ASIANINFRASTRUCTURE
INVESTMENTBANK:CHINA AS RESPONSIBLE
STAKEHOLDER?
CONTRIBUTORS:

Daniel Bob, Editor
Tobias Harris
Masahiro Kawai
Yun SunSasakawa Peace Foundation USA

Sasakawa Peace Foundation USA

ASIANINFRASTRUCTURE
INVESTMENTBANK:CHINA AS RESPONSIBLE
STAKEHOLDER?
Introduction...............................................................................................1
by Daniel Bob

Asian Infrastructure Investment Bank in the Evolving
International Financial Order..............................................................5
by Masahiro Kawai

China and the Evolving Asian Infrastructure
Investment Bank....................................................................................27
by Yun Sun

The U.S. Response to the Asian Infrastructure
Investment Bank....................................................................................43
by Tobias HarrisSasakawa Peace Foundation USA

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Introduction
by Daniel Bob

I

n 2013, China announced it would establish the
Asian Infrastructure Investment Bank (AIIB) to help
meet the enormous demand for new infrastructurein Asia. In 2009, the Asian Development Bank
(ADB) projected that such demand would reach $8 trillion
between 2010 and 2020, vastly more than ADB and otherexisting multilateral development banks (MDBs) could
finance.
Countries in the region responded positively
to China’s proposal, with many pledging to join thebank. The United States and Japan, however, took acautious approach. Despite the existing MDBs’ resource
constraints, they viewed AIIB more as a challenge to theexisting Bretton Woods institutions, than a complement.
As China moved ahead with its plans for AIIB,
both the United States and Japan questioned China’s
motivations and intentions as well as Beijing’s ability tocreate a high-standard, well-functioning international
financial institution. The United States went further: it
lobbied allies and partners against joining the bank.
To the apparent surprise of both Washington and
Beijing, on March 12, 2015, George Osborne, the United
Kingdom’s Chancellor of the Exchequer, announced that
Britain would join AIIB. The UK decision opened thefloodgates, and another two dozen European and othercountries with close ties to the United States quickly
signed up. By the April 15, 2015, deadline, a total of 57
nations had joined as prospective founding members. Fiftyof those nations have since committed to full participation
as founding members, while the remaining seven have
until the end of 2015 to make a final decision.
China’s push to establish AIIB and the responseby the United States and Japan are important, in andof themselves, given Asia’s need for infrastructure. The
actions taken by all three also seem to illustrate many of

the issues that attend China’s swift economic, military anddiplomatic rise. Indeed, China’s reemergence as a major
power, the extent to which it works within the boundsof existing international institutions and follows global
norms, coupled with other nations’ willingness to accept
and accommodate that reemergence, present some of themore difficult issues of 21st century geopolitics.
To get a sense of how those issues are playingout among Bretton Woods institutions, Sasakawa
USA commissioned papers on AIIB’s creation anddevelopment by experts from China, Japan and theUnited States.
Dr. Masahiro Kawai, former head of the AsianDevelopment Bank Institute, provides a view from Japan.
He compares AIIB to existing MDBs in its governance,
financial operations, scale, membership, capitalsubscriptions, voting shares and focus, concluding thatthe new bank parallels them in many respects.
Dr. Kawai presents an example of how a new MDB,
the Andean Development Corporation, cultivated acomplementary relationship with a comparable existing
institution, the Inter-American Development Bank, andhow that experience might offer lessons regarding AIIB’s
interactions with ADB.
He goes on to assess China’s mix of motivations inestablishing AIIB, which included the goal of helping meetthe large demand for infrastructure in Asia. He points to
American, Japanese and European domination of existing
international financial institutions. In large part, that
domination results from the failure of the U.S. Congress
to permit reforms at the International Monetary Fundthat would give China and other countries voices in theFund more commensurate with their increased economic
power. China also saw the bank as a vehicle for expanding
external demand to absorb domestic excess capacity andAsian Infrastructure Investment Bank: China as Responsible Stakeholder? 1

SASAKAWA PEACE FOUNDATION USA

a potential support for its foreign policy objectives andambitious plans to build overland and maritime “SilkRoads” connecting and integrating China with Central
Asia, the Middle East, Africa and Europe.
Dr. Kawai then analyzes AIIB’s current weaknesses.
Perhaps most important is its lack of a coherent vision, but
the bank also has a governance structure and allocationof voting shares that China may overly dominate,lending policies that may neglect environmental andsocial standards or fail to follow best practices, potential
difficulties attracting personnel with the requisite expertiseand a possible unwillingness to coordinate with existing
MDBs.
He explains the reasons behind Japan’s initialdecision not to join AIIB, pointing first to a fundamental
lack of trust between Tokyo and Beijing due to disputes
over history and territorial issues. More directly, Japan
had concerns over the new bank’s governance andlending standards, and suspicions that China would use
AIIB primarily as an instrument for realizing its narroweconomic and strategic goals. Finally, Dr. Kawai weighs thepros and cons of Japan joining the bank, and concludes
that Tokyo should take a wait-and-see approach, though it
should also encourage existing MDBs to engage and workwith AIIB.
Yun Sun, a Senior Associate at the Stimson Center,examines China’s motivations in establishing AIIB. She
argues that it fits into President Xi Jinping’s vision for the“great rejuvenation of the Chinese nation,” which includes
establishing a new, “proper” international order reflecting
China’s greater economic and political weight. AIIB was
designed, in part, she says, to expedite the emergence ofthat new order.
Like Dr. Kawai, she cites such other motivations
as China’s aim to help meet Asian demand for new
infrastructure, provide financial and technical support
for China’s Silk Road initiatives, further China’s strategic
objectives, boost external demand to absorb excess
capacity and give it a voice in an international financial
institution focusing on Asia that corresponds to China’s
economic influence in the region. She also notes that AIIB
may help China achieve its aim of internationalizing theyuan.

2 Asian Infrastructure Investment Bank: China as Responsible Stakeholder?

Ms. Sun then examines how China’s plans for AIIB
changed over time as a result of internal negotiations withmembers over the Articles of Agreement, the bank’s basicorganizing document, as well as external pressure from theUnited States and Japan. China did not initially anticipate
or encourage membership by non-Asian countries.
However, as interest outside of Asia grew, China dropped
its focus on establishing an exclusively regional bank, andit allotted 25% of capital shares to non-regional members.
China also moved away from earlier proposals that thebank function as either an aid organization or a commercialbank, and clarified AIIB’s role as one close to that ofexisting MDBs.
In addition, China lowered its planned capital
contribution to the bank – from a level that might havetranslated into absolute veto powers – and focused on amore circumscribed range of areas over which it could
exercise dominance. Given such changes, Ms. Sun
concludes that, while ultimate judgment must await thebank’s actual performance, AIIB’s development showsthat, as China challenges the existing international system,
those seeking to maintain the essential elements of thatsystem may check China’s ambitions and push it closer toplaying by the established rules.
Tobias Harris, Fellow for Economics, Trade andBusiness at Sasakawa USA, assesses the U.S. response
to AIIB. He argues that it encapsulates problems in the
Obama administration’s “pivot” to Asia, a set of policies
designed to preserve and extend the U.S. diplomatic,
economic and political position in the Asia Pacific. To
counter widespread views within China and elsewherethat the pivot is a thinly veiled attempt to contain China,
the administration has repeatedly denied it has any
such intention, essentially reinvigorating the previous
administration’s call for China to act as a “responsible
stakeholder.”However, rather than engaging AIIB constructively
as a new multilateral opportunity to address the regional
shortfall in infrastructure financing, the United States
advocated against allies and partners participating in the
new bank. Washington portrayed the bank as a threat toexisting institutions by focusing on AIIB’s potentiallylower standards.

SASAKAWA PEACE FOUNDATION USA

Harris characterizes the rush of allies and partners in
Europe and elsewhere to join the bank as an embarrassing
failure of U.S. diplomacy. The U.S. arguments against
AIIB focused on narrow, institutional standards within thebank, neglecting the larger strategic picture. Harris agrees
with Yun Sun, however, that U.S. resistance to AIIB may
have played a useful role in pushing China to improve thebank’s operating structure.
Harris goes on to explore the reasons for the
imprudent U.S. response. Congressional opposition to
the United States joining any new international financial
institution, let alone meeting commitments to existingones, fundamentally limits options for the United States.
However, the U.S. response was also driven by aninitial lack of information on AIIB, the administration’s
preoccupation with Ukraine and the Islamic State,a predisposition within the Treasury Department topreserve the current Bretton Woods institutions’ position
and a desire to maintain U.S.-Japan relations when Japan
opposed the bank.
Harris concludes with his views on lessons learned
for the United States in dealing with China and thedevelopment of new institutions in Asia. He maintains that
the United States should offer its own solutions to regional
problems rather than reflexively oppose new institutions
offering fresh approaches. Moreover, Washington should
recognize that agenda-setting and institution-building in
Asia by China and others are not necessarily zero-sum
games. Indeed, new initiatives may even potentially benefit
the United States. He contends that Washington needs
to address Beijing’s valid complaints over the governanceof existing international financial institutions, which do
not align voting powers for China and other memberswith their recently increased economic weight, or more
fundamentally, allow China room to become a responsible
stakeholder in the existing international system.
As of the summer of 2015, Japan has indicated thatit may ultimately seek membership in the bank, while theUnited States is holding back but taking the position that
it welcomes AIIB. Prime Minster Abe said at an April 28,
2015, joint press conference with President Obama that,“For Japan to participate in the AIIB is a decision that
we have not taken yet.” At the same press conference,

President Obama said in reference to AIIB, “To the extent
that China wants to put capital into development projects
around the region, that’s a positive. That’s a good thing.”
AIIB is scheduled to begin operations at the end of
2015, so both the United States and Japan will have to findways to accommodate it. In the meantime, as these papers
show, China is acutely aware of the international interestin the bank and appears likely to take the steps necessary
to make the institution function appropriately. However,many operational details have yet to be worked out andmany hurdles remain.

Asian Infrastructure Investment Bank: China as Responsible Stakeholder? 3

SASAKAWA PEACE FOUNDATION USA

Asian Infrastructure Investment
Bank in the Evolving International
Financial Orderby Masahiro Kawai*

1. INTRODUCTIONI

n mid-April 2015, the Chinese Finance Ministryannounced that 57 countries had signed theMemorandum of Understanding on Establishing
the Asian Infrastructure Investment Bank (AIIB),
thereby becoming prospective founding members of the
China-led bank. The group was comprised of 37 Asianand 20 non-Asian nations, including the United Kingdom,
Germany, France and Italy – four of the Group of Seven(G7) countries. They then negotiated the Articles ofAgreement to Establish the AIIB (AOA), which 50 nations
signed toward the end of June to become full founding
members.1 AIIB is scheduled to start operating by the endof 2015.
The authorized capital stock for AIIB will be US$100
billion. China dominates the bank as its largest shareholder
with a capital contribution share of 30% and a voting
power share of 26%. In addition, the bank’s headquarters
will be located in Beijing and its president will be Chinese,the most likely being Jin Liqun, a former vice minister offinance in China’s Ministry of Finance and a former vice
1

Seven prospective founding members did not sign the Articles of Agreementin June but have until December 2015 to do so. They are: Denmark, Kuwait,
Malaysia, Philippines, Poland, South Africa and Thailand.

president of the Asian Development Bank (ADB).
Given vast infrastructure investment needs, Asia’s
developing countries have welcomed China’s push toestablish AIIB. The United States and Japan, however,
have viewed AIIB with caution and skepticism and stayed
away. Indeed, both Washington and Tokyo have raisedquestions about China’s motivations in establishing AIIB,
including the bank’s potential to challenge the existing
international financial order, led by the Bretton Woods
institutions, in which the United States and other G7
countries are dominant shareholders. Japan also views
AIIB as a potential direct competitor to ADB, which
Tokyo leads as the largest shareholder and the provider ofpresidents.
In addition to establishing AIIB, China has worked
with other BRICS (Brazil, Russia, India, China andSouth Africa) countries to create a New Development
Bank and a Contingent Reserve Arrangement. China has
also promoted the internationalization of its currency,
the renminbi (RMB), and actively pushed for the RMB’s
inclusion in the basket of currencies upon which the valueof the IMF’s Special Drawing Rights (SDR) is based.
With the economic weight of emerging anddeveloping countries having risen quickly since the global
financial crisis of 2008, the advanced G7 countries, alone,
can no longer manage the world’s economic and financial* The author is grateful to Masatsugu Asakawa (Vice Minister of Finance for International Affairs, Japan’s Ministry of Finance), Jin Liqun (Secretary General, MultilateralInterim Secretariat, AIIB), Takehiko Nakao (President, ADB), Yang Shaolin (Director General, Department of International Economic and Financial Cooperation, China’s Ministryof Finance) and Zao Jiayi (Director General, Department of international Economic Relations, China’s Ministry of Finance) for their insights as background for this paper. He
also thanks Daniel Bob (Sasakawa Peace Foundation, USA) for detailed comments and suggestions for improvements on earlier versions of the paper.

Asian Infrastructure Investment Bank: China as Responsible Stakeholder? 5

SASAKAWA PEACE FOUNDATION USA

challenges. As a result, the Group of Twenty (G20),
which represents the world’s 20 largest economies, has
emerged as the most prominent forum for international
policy coordination. Associated with this change, theinternational financial order appears to be in transition,from one dominated by the United States and the U.S.-led
G7 to a multipolar system in which major emerging anddeveloping countries also play an important role. The
establishment of AIIB encapsulates that evolution.
This paper is organized as follows: Section 2 defines
AIIB as a multilateral development bank (MDB) andcompares it with major existing MDBs and the Andean
Development Corporation in Latin America. Section 3summarizes motivations behind China’s move to establish
AIIB. Section 4 identifies issues for AIIB, including
its vision, governance, lending policies and standards,
human capital and expertise and coordination with otherstakeholders. Section 5 explores options for Japan. Section
6 discusses challenges for China and the international
community. Section 7 offers conclusions.

2. WHAT IS AIIB?
(1) AIIB as an MDBAIIB will be a multilateral development bank – aninternational financial institution, formed by a group ofnations, to provide financing for infrastructure investment
and other forms of assistance aimed at spurring the
economies of developing countries.2 MDBs usually financeprojects in one of three ways – through long-term loans at
quasi-market rates, very long-term loans at below-market
rates (concessional loans) and grants. There are some
20 MDBs in the world (Linn 2014). Examples of MDBs
include the World Bank, ADB, the African Development
Bank (AfDB), the European Bank for Reconstruction
and Development (EBRD) and the Inter-American
Development Bank (IDB).

2An MDB is defined as an international organization that: (i) is establishedthrough international treaty by sovereign nations as its shareholders; (ii)promotes economic development in developing countries; (iii) provides loans
largely (but not exclusively) to sovereign governments; (iv) has sufficient capital
to be financially viable; and (v) raises funds primarily in the international capital
market, with the guarantee of shareholding governments. See Humphrey andMichaelowa (2013).

6 Asian Infrastructure Investment Bank: China as Responsible Stakeholder?

Unlike other MDBs, AIIB will focus exclusively on
infrastructure and other physical investments in Asia’s
developing countries. According to AIIB’s MultilateralInterim Secretariat (see Box 1), AIIB will provide financing
in such areas as energy and power, transportation and
BOX 1

What is the Asian Infrastructure
Investment Bank?
• The Asian Infrastructure Investment Bank (AIIB) isa multilateral development bank (MDB) conceived
for the 21st century. Through a participatory
process, its founding members are developing its
core philosophy, principles, policies, value systemand operating platform. The bank’s foundation
is being built on lessons learned from existing
MDBs and the private sector. Its modus operandi
will be lean, clean and green: lean, with a small,efficient management team and highly skilled staff;
clean, an ethical organization with zero tolerance
for corruption; and green, an institution built on
respect for the environment. AIIB will put in placestrong policies on governance, accountability,
finance, procurement and environmental andsocial frameworks.
• AIIB will be a modern, knowledge-based
institution focusing on the development of
infrastructure and other productive sectors inAsia, including energy and power, transportationand telecommunications, rural infrastructure
and agriculture development, water supply andsanitation, environmental protection, urban
development and logistics. The operational
strategy and priority areas of engagement may berevised or refined by its governing boards in the
future as circumstances warrant.
• AIIB will complement and cooperate withthe existing MDBs to address the daunting
infrastructure needs in Asia. The bank’s openness
and inclusiveness reflect its multilateral nature.
AIIB welcomes all developing and developed
countries, both regional and non-regional,
that seek to contribute to Asian infrastructuredevelopment and regional connectivity.
Source: Website of the Multilateral Interim Secretariat, Asian Infrastructure
Investment Bank, http://aiibank.org/, accessed May 20, 2015

SASAKAWA PEACE FOUNDATION USA

telecommunications, rural infrastructure and agriculture
development, water supply and sanitation, environmental
protection, urban development and logistics. AIIB
will not provide assistance in health or education, norwill it provide concessional loans or grants, at least in its
initial stage.

FIGURE 2

Mode of Financial Operations of a Typical MDB
Non-concession
Loans

MDB Bonds

International
CapitalMarketMDB
Concession
Loans

Funds

Borrowing
MemberCountries

FIGURE 1

Typical MDB Governance Structure
Board of Governors

Board of Directors

Management(President, Vice Presidents)
Source: Author

Repayment

Grant

A typical MDB determines voting powers of member
governments largely based on their capital contributions.
Capital contributions, in turn, are determined by themember countries’ capacity to contribute, generally as
measured by their economic size. Additional basic votes
are distributed to all members equally to compensate small
members for limited voting powers. AIIB closely follows
this approach.
A typical MDB has a governance structure illustrated
by Figure 1. The highest decision-making body is its boardof governors, consisting of officials (often finance ministers)of member countries. Day-to-day decisions, including
approval or disapproval of individual loan projects, aredelegated to a board of directors, which also has the
responsibility for monitoring the management of the MDB(president and vice presidents). Although AIIB will largely
follow this governance structure, its board of directors may
have more limited powers than those of other major MDBs
as discussed below in Section 3(2).

CapitalGovernance Structure
Repayment

Member Countries
Source: Author

Mode of Financial Operations
The mode of financial operations for a typical MDB ispresented in Figure 2. AIIB will function in a similar way,
except that it will not make concessional loans – at leastat the beginning of its operation. An MDB is financedby member countries’ capital and grant contributions.
Based on its capital base, an MDB issues bonds in theinternational capital market to raise funds, which are used
for non-concessional loans to the MDB’s developing
country members. The credit rating of the MDB affects
its funding costs, hence the interest rates it charges toborrowers. These rates generally exceed funding interest
rates by 50-100 basis points. Grant contributions are
sources of concessional loans, i.e., loans with zero orvery low interest rates with long maturities, designed for
low-income countries. The World Bank’s International
Development Association, ADB’s Asian Development
Fund and AfDB’s African Development Fund provide
such concessional loans.
A new MDB can expect to enjoy the same benefits asexisting MDBs, including secure, solid institutional andcapital foundations to raise funds and provide loans tomember countries by leveraging capital subscriptions andgenerating a substantial multiplier effect in terms of fundmobilization. For any MDB to work effectively, it must
maintain transparent governance and a high credit rating,and possess the human capital and expertise to manage
capital, debt, loans and related risks. AIIB faces potential
challenges in each of these areas as explored below.
Asian Infrastructure Investment Bank: China as Responsible Stakeholder? 7

SASAKAWA PEACE FOUNDATION USA(2) AIIB Versus Existing Major MDBs
The characteristics of AIIB can be best understood bycomparing it with those of the existing major MDBs. Table
1 summarizes various properties of the major MDBs (theWorld Bank, ADB, AfDB, EBRD and IDB), the Andean
Development Corporation (Corporación Andina de
Fomento or CAF) and the International Monetary Fund(IMF) in comparison to those of AIIB.3 In five areas,
notable differences are apparent.
First, AIIB is relatively large in terms of membershipand capital subscriptions. It has 50 member countries
and another seven prospective members, while IDB has
only 48 members. AIIB’s authorized capital stock of $100
billion is larger than that of EBRD and AfDB at $39 billion
and $81 billion, respectively.
Second, AIIB’s major shareholders come from Asia
and represent more than 70% of capital subscriptionsand voting powers. Japan and the United States are notmembers. In the case of other MDBs, such as AfDB and
IDB, while developing countries hold more than 50%
of capital subscriptions and voting powers, developed
economies, including the United States, Japan and EU
countries, are also major shareholders.
Third, unlike the existing MDBs, which have strong
governance structures with resident boards of directors,
AIIB will have no resident board. This could potentiallyweaken the role of shareholder governments at AIIB,
while strengthening the powers of the bank’s management.
China, as the dominant shareholder venue for the bank’s
headquarters and country of origin for its president, will
have the most influence over the bank’s operations andloan decisions.
Fourth, the share of paid-in capital as a portion of total
capital subscriptions will be 20% for AIIB, substantiallymore than other MDBs, with the exception of EBRD
and CAF. Since EBRD makes loans to the private sector,
rather than to sovereign borrowers, it needs greater paidin capital to maintain high credit ratings. Being owned
predominantly by Latin America’s developing countries
whose financial conditions are weak relative to those ofdeveloped countries, the paid-in capital ratio of CAF
3

Although IMF is not an MDB, it is listed for comparison.

8 Asian Infrastructure Investment Bank: China as Responsible Stakeholder?

needs to be high to ensure a reasonably high credit rating.4
Similarly, with Asia’s emerging and developing countries
being AIIB’s dominant shareholders, the bank will alsoneed a large proportion of paid-in capital to obtain asatisfactory credit rating.5
Fifth, while the major MDBs focus on poverty
reduction, sustainable development and social
development, AIIB will emphasize infrastructure
investment and connectivity. And while sustainable
development and social development are mentioned in the
Articles of Agreement, AIIB is not expected to give priority
to projects aimed at poverty reduction or social sector
support in areas such as education and health. Major
MDBs have concessional windows (the International
Development Association at the World Bank, the AsianDevelopment Fund at ADB and the African Development
Fund at AfDB), providing very long-term loans at zero ornear-zero interest rates to low-income countries. AIIB will
not have a concessional window.

(3) AIIB-ADB Parallels to IDB-CAF Relationsin Latin America
When considering the role of AIIB and its potential forcompetition and cooperation with ADB in Asia, someinteresting parallels may be drawn to the relationshipbetween IDB and CAF in Latin America.
The World Bank and IDB used to be the main MDBs
supporting economic development in Latin American
and Caribbean countries. The five Andean Community
countries of Bolivia, Colombia, Ecuador, Peru andVenezuela founded CAF in 1970 with an initial capitalsubscription of $25 million. Headquartered in Caracas,
Venezuela, CAF’s membership has grown to 18 countries
in Latin America and the Caribbean, as well as Spain andPortugal, along with 14 private banks. Capital subscriptions
have also grown to $7.8 billion, with plans for an additional$6.3 billion by 2017. CAF’s mission is to stimulate
4

All major MDBs enjoy the credit ratings of AAA, while CAF’s credit rating is
AA- according to Fitch Ratings. (CAF, Annual Report, 2013).
5
Sub-regional MDBs in Africa and Latin America and the Caribbean, such as
the East African Development Bank, Eastern and Southern African Trade andDevelopment Bank, West African Development Bank, Caribbean Development
Bank (CDB), and Central American Bank for Economic Integration (CABEI),
also have high paid-in capital ratios of more than 20%.

SASAKAWA PEACE FOUNDATION USA

TABLE 1

Properties of the Existing Major MDBs, IMF and AIIBIMFWorld Bank

EBRD

AfDB

ADB

IDB

CAF

AIIB

Year
established

1944

1944

1991

1964

1966

1959

1968

2015 (planned)

Headquarters

Washington,
DC, US

Washington,
DC, US

London, UK

Abidjan, Ivory
Coast

Manila,Philippines

Washington,
DC, US

Caracas,Venezuela

Beijing, China

HeadEuropean(Christine
Lagarde)American(Jim Yong Kim)

European(Suma
Chakrabarti)

African(Akinwumi
Adesina)

Japanese(Takehiko
Nakao)South
American(Luis Alberto
Moreno)South
American(EnriqueGarcía)Chinese(Jin Liqun,
expected)

Membercountries

188

188

64
(Plus EU &
EIB)

80

67

48

18 (plus 14
private banks)

50 (June 2015)

Capitalsubscriptions$368 billion$283 billion$39.4 billion(€29.7 billion)$80.8 billion$163.5 billion$144.3 billion$7.8 billion$100 billion

Paid-in
capital ratio

—

—

20.9%

4.9%

5.0%

3.7%

39.4%

20.0%

Group
institutions—

IBRD, IDA, IFC,MIGA—

OCR, AfDF,
NTF

OCR, ADF

IIC, MIF

Major
shareholders

US, Japan,
Germany, UK& France,
China

US, Japan,
China,
Germany,
France & UK

US, France,
Germany, Italy,
Japan & UK

Nigeria, US,
Japan, Egypt,
South Africa

Japan, US,
China, India,
Australia

US, Argentina& Brazil,
Mexico, Japan

Peru,
Venezuela,
Colombia,
Argentina,
BrazilChina, India,
Russia,Germany,
Korea

Developing
country
voting shares

Developing
and emerging
countries:
42.1%

Developing
and emerging
countries:
42.1%

Transition
economies:
13.8%

Regional:
59.5%

Regional:
65.1% (DMCs:
46.8%)

Regional:
50.015%

Regional:
95.5%

Regional: 75%

Key decisions

85% majority

80% majority

80% majority

70% majority

75% majority

75% majority

80% majority

75% majority

Board ofdirectors

Resident

Resident

Resident

Resident

Resident

Resident

Non-resident

Non-resident

Major task

Macroeconomic
stability,
response tofinancial crisis

Economicdevelopment,poverty
reduction, andpolicy advice

Developmentof open andsustainable
marketeconomies
committed to,
and applying,
democratic
principles

Sustainableeconomic
growth andreducing
poverty

Economicdevelopment,poverty
reduction, andpolicy advice

Economicand social
development
and regional
integration

Sustainable
development
and regional
integration

Infrastructuredevelopment
andconnectivity in
Asia—

ADB = Asian Development Bank, ADF = Asian Development Fund, AfDB = African Development Bank, AfDF = African Development Fund, AIIB = AsianInfrastructure Investment Bank, CAF = Corporación Andina de Fomento (Andean Development Corporation), DMC = developing member country, EBRD =European Bank for Reconstruction and Development, EIB = European Investment Bank, EU = European Union, IBRD = International Bank for Reconstruction
and Development, IDA = International Development Association, IDB = Inter-American Development Bank, IFC = International Finance Corporation, IIC =Inter-American Investment Cooperation, IMF = International Monetary Fund, MIF = Multilateral Investment Fund, MIGA = Multilateral Investment Guarantee
Agency, NTF = Nigerian Trust Fund, OCR = Ordinary Capital Resources.
Source: Author’s compilation of website information.

Asian Infrastructure Investment Bank: China as Responsible Stakeholder? 9

SASAKAWA PEACE FOUNDATION USA

sustainable development and regional integration by
financing projects in the public and private sectors and byproviding technical assistance and other specialized services.
CAF has seen a rapid growth of its loans to Andean
countries, especially since the mid-1990s. Its total loan
portfolio and equity investment reached $18.2 billion in2013, exceeding the $13.3 billion in loans approved by
IDB that same year. One of the factors behind CAF’s loan
expansion has been the rapid speed at which it approvesloans, averaging three to five months as opposed to IDB’s
10 months and the World Bank’s 16 months (Humphrey
and Michaelowa 2013). In addition, CAF has minimized
bureaucratic procedures for loan approval; the WorldBank has maintained a rigid and legalistic approach.
CAF does not have formally defined safeguard policies
and only a brief list of guiding principles. It imposes nobinding constraints on the environmental and social
aspects of projects, beyond national legislation.6 A final
factor contributing to CAF’s growth has been its lack of aresident board of directors. Instead, loans are approved bysenior management of the bank, which increases agility inthe approval process.
Based on its economic evaluation of projects,
CAF and the borrowing country agree on matrices ofactions to be taken by the borrower. Failure to fulfill theagreed actions, however, does not necessarily preclude
the disbursement of loans, as CAF may offer technicalassistance to help the country meet its obligations(Griffith-Jones 2008). The fact that CAF approves loans
quickly and provides flexible lending conditions helps
explain why Andean member countries have increasingly
borrowed from CAF – even though its loans are more
expensive, due to its lower credit rating – rather than from
IDB or the World Bank.
In the mid-1990s, as IDB recognized the competitive
pressures produced by CAF and other banks in region,7and CAF and the other banks recognized the limits of

6

In contrast, the World Bank and IDB require a series of procedures andmeasures above and beyond the national legislation of borrowing countries
for their infrastructure projects. The reason is that their developed country
shareholders are pressured by domestic environmental groups and legislatures toimplement rigid safeguards in these projects (Humphrey and Michaelowa 2013).
7
These other sub-regional banks include CABEI, CDB and the Financial Fundfor the Development of the River Plate Basin (FONPLATA).

10 Asian Infrastructure Investment Bank: China as Responsible Stakeholder?

their human resources, the two sides initiated a processof dialogue and consultation that ultimately resulted
in collaboration. They based their cooperation on
three principles: compatible strategies and policies,
complementary actions and enhanced resources. Basedon these principles, IDB started co-financing projects
with CAF and other sub-regional banks, subject to IDB’s
stringent rules governing such projects. Based on the
success of those efforts, CAF has also begun working with
the World Bank.
The changed dynamics in Latin America between
CAF and IDB provide important lessons for Asia. For
example, if AIIB provides loans faster and with more
flexible procedures and safeguards than existing MDBs,
it may expand operations quickly, thereby puttingcompetitive pressure on ADB and the World Bank.
Moreover, ADB and the World Bank should consider
working with AIIB to enhance the latter’s capacity as an
MDB and help make it a compatible and complementarybank, whose additional resources could be invested to
produce more sound Asian economies. Finally, just ascompetition from CAF drove IDB to enlarge its focus
from investment in infrastructure to investment in capacity
building and social and public sectors (Prada 2014),
ADB may wish to expand its support in areas where it hascomparative advantages over AIIB.

3. MOTIVATIONS BEHIND CHINA’S MOVETO ESTABLISH AIIB
China seems to have had four basic motivations inestablishing AIIB: (i) closing the huge infrastructure
investment gap in Asia, (ii) responding to dissatisfaction
with the existing international financial institutions,(iii) meeting China’s domestic economic needs and (iv)achieving China’s foreign policy objectives.

(1) Infrastructure Investment Gap in Asia
Any country’s economic success depends, in part, on
infrastructure investment. Such investment can provide
higher standards of living through the provision of basic
services (electricity, transport, water, sanitation and othersocial services); reduction in poverty by giving farmers,
workers and small- and medium-sized enterprises

SASAKAWA PEACE FOUNDATION USA

expanded access to markets; improvement in the
productivity and competitiveness of firms; increases inthe density and scale of economic activity; and promotionof environmental sustainability and social inclusion.
Infrastructure investment also tends to encourage private
investment, including inflows of foreign direct investment(ADB and ADBI, 2009).
Asia has an enormous demand for infrastructurethat developing country governments and existing
MDBs, such as the World Bank and ADB, cannot meet.
According to ADB and ADBI (2009), between 2010
and 2020, developing Asia needs to invest about $750
billion annually in energy, transportation, informationand communication technology (ICT) and water andsanitation infrastructure.
Figure 3 provides estimates of infrastructure
investment needs for individual developing countries
in Asia. It shows that several countries (Tajikistan, Lao
People’s Democratic Republic [PDR], Mongolia, Kyrgyz

Republic, Afghanistan, Bangladesh and India) need toinvest more than 10% of GDP in coming years, whileothers (Uzbekistan, Cambodia, Viet Nam, Nepal andPakistan) need to invest more than 8% of GDP. Someeconomies need to invest heavily in transport, while others
need to invest in electricity and/or ICT.
In most developing countries, the amount of actual
infrastructure investment has fallen below needs. For
example, Mongolia’s actual investment of 1.5% of GDP
falls well below the 12.5% needed, while the infrastructure
investments of both Sri Lanka and Nepal fall more than
1% short.
The World Bank and ADB have provided annually
about $15 billion and $13 billion, respectively, forinfrastructure investment in Asia, far less than theestimated need. Based on successful experience in national
infrastructure development, China wants to take the leadin helping to cover some of the shortfall through AIIB.

FIGURE 3

16
14
12
10
8
6
4
2
0

Tajikistan
Lao PDR
Mongolia
Kyrgyz Republic
Afghanistan
Bangladesh
India
Uzbekistan
Cambodia
Nepal
Pakistan
Viet Nam
Sri Lanka
Malaysia
Indonesia
MyanmarPhilippines
Kiribati
China
Azerbaijan
Thailand
Samoa
Papua New Guinea
Solomon Islands
Vanuatu
BhutanKazakhstan
Tonga
Armenia
Georgia
Fiji
Timor-Leste

Estimated Infrastructure Investment Needs for Asian Economies(Annual Average from 2010-2020 as a Percent of GDP)

Transport

Electricity

ICT

Water and Sanitation

Source: Bhattacharyay (2012).

Asian Infrastructure Investment Bank: China as Responsible Stakeholder? 11

SASAKAWA PEACE FOUNDATION USA(2) Dissatisfaction with the Existing Institutionsand Willingness to Lead
The economic and financial power of China and othermajor emerging countries has grown rapidly, but their
voice in existing international financial institutions has
not kept pace. These countries generally view the existing
institutions, including IMF, the World Bank and ADB, as
dominated by the U.S.-led G7 countries and unwillingto make necessary reforms to reflect the increased
economic clout of emerging nations. Even thoughdeveloping countries could contribute more capital tothese institutions and thereby attempt to raise their voting
powers, they believe developed country members seeking
to maintain their influence would block such actions.
A good example is the case of the IMF quota andgovernance reform package, which was approved in
December 2010 by the Fund’s board of governors, thehighest decision-making body of the institution. The
package called for:• Doubling IMF quotas, the institution’s principal
source of financial resources, from SDR 238.4 billion
to SDR 476.8 billion (about $755.7 billion);8• Shifting more than six percentage points in quota sharefrom developed countries and some oil producing
countries to dynamic emerging and developing
countries;9• Shifting two seats on the IMF board of executive
directors from advanced European countries toemerging countries to reflect the proposed change inquotas.
The reform would have made China the third largest IMF
shareholder after the United States and Japan, and allowed
three of the other BRICS countries – Brazil, Russia andIndia – to become top-10 shareholders. At the same time,the voices and voting shares of the poorest countries
would have been maintained.

8This quota increase had been agreed under the 14th General Review of
Quotas as part of the 2008 quota and voice reform.
9
It was also agreed that a new formula for calculating quotas should be decided
by January 2013, and that the next quota review should be completed by January
2014. However, these new initiatives have been suspended due to the delay inimplementing 2010 reforms.

12 Asian Infrastructure Investment Bank: China as Responsible Stakeholder?

Ratification of the package, however, requires an 85%
majority vote of the board of governors. Since the UnitedStates holds 17% of those votes and the U.S. Congresshas not approved the IMF package, the United States has
effectively prevented the reforms from going into effect forfive years.
China and other emerging economies have come tobelieve that the United States opposes the IMF reforms
in order to retain Washington’s dominant position, while
simultaneously constraining a rise in China’s influence
over the institution. Indeed, China seems to haveconcluded that any reform of the existing institutions thatwould allow it a larger voice will be difficult, due to U.S
intransigence.
The United States and developed European countries
play dominant roles at IMF and the World Bank, while
Japan takes the lead at ADB with U.S. support. Japan’s
voting share in ADB is more than twice that of China’s,
and a Japanese national has always headed the bank.
China has no such influence at an existing international
financial institution, despite the country’s status as theworld’s second largest economic power, ahead of Japanand second only to the United States. That disparity andthe effective veto wielded by the United States to correct itseem to have contributed significantly to China’s decision
to create a new bank that would allow Beijing to lead in
Asia’s economic development through infrastructure
investment.

(3) Domestic Economic Needs
After 30 years of double-digit GDP growth rates, China’s
growth decelerated due to the global financial crisis of2008. Indeed, China attempted to maintain high growth in
the face of that crisis by raising public investment spending
by CNY4 trillion and easing monetary policy. While
China achieved its goals through 2011, growth rates havesince fallen to 7-8%, due to domestic over-investment,
excess credit, excess capacity and a shrinking labor force,
coupled with stagnant economic conditions in developed
economies. Excess capacity has become massive even by
Chinese standards, particularly in materials-producing
sectors, such as steel and cement. Financial vulnerabilities
have also risen due to large borrowing by local

SASAKAWA PEACE FOUNDATION USA

governments, housing bubbles and the spread of shadowbanking.
The Xi Jinping administration, inaugurated in 2013,
has embarked on a plan to make structural reforms to
reduce over-investment, excess capacity and excess credit,
and achieve more balanced, sustainable economic growth.
Xi has emphasized the decisive role of the market inresource allocation and aimed for less resource-intensive
and more employment-intensive, services-sector-oriented
and consumption-driven economic growth. China admits
that it has entered a “new normal,” with permanently
slower growth rates of 7-8%, which will require structuralreforms to be maintained.
An important challenge for Chinese authorities is
how to make a smooth transition to a stable economy. In
several important sectors, such as steel and cement, output
is well below capacity, a gap so large that exports cannot
solve this problem given the relatively stagnant conditionsof the U.S. and European economies. A slowdown in
China’s infrastructure and property investment, which theXi administration has pursued, would further aggravate
the country’s already low capacity utilization. Significantly,
stimulating aggregate demand would also go against Xi’s
structural reform efforts.
In this context, expanding external demand through
AIIB’s operations, rather than a cheap RMB, could bea useful way to support market-oriented reform of theChinese economy. Infrastructure projects in AIIB member
countries could provide them economic stimulus sufficient
to offer export opportunities for manufacturing firms
struggling with excess capacity. Similarly, infrastructure
firms facing shrinking domestic opportunities could
expand their activity abroad.
AIIB is expected to support China’s “One Belt, One
Road” initiative to construct both overland and maritime“Silk Roads” (see AIIB Multilateral Interim Secretariat2014). The Silk Road Economic Belt will connect China
with Central Asia, West Asia and Europe through overlandtransport systems, while the Maritime Silk Road willconnect China with the South China Sea, the Indian
Ocean, the Middle East, Africa and Europe throughmaritime transport systems. The bilateral Silk Road Fund,established in November 2014 with $40 billion, will support

these initiatives, and AIIB is expected to be involved as well.
Construction projects could help China make use of its
enormous infrastructure and industrial overcapacity andprod increased sales of Chinese products in regional
markets.

(4) Pursuit of Foreign Policy Objectives
China could use AIIB as an instrument for realizing its
major foreign policy objectives, which include: (i) politicalstability; (ii) sovereign security, territorial integrity andnational unification; and (iii) sustainable economic andsocial development. In pursuing these objectives from the
1990s until recently, China abided by Deng Xiaoping’s
famous approach on foreign policy: “keep a low profile
and achieve something (taoguang yanghui)” (Chen andWang 2011). Over the last several years, however, Deng’s
approach has been replaced by a more confident andassertive posture. China now seeks to establish a new
type of great power relations with the United States; itaggressively claims territories in the South and East China
Seas; it attempts to connect China with Europe throughtwo Silk Roads; and it leads initiatives to create newinternational financial institutions, such as AIIB.
The strategic use of economic incentives to pursue
One Belt, One Road will assist China in fulfilling its
foreign policy objectives of improving diplomatic
relations with its Asian neighbors and expanding its
regional and global influence. The One Belt, One Road
initiative highlights China’s ability to use its enormous
financial resources for infrastructure investment in Asianneighbors as an inducement for them to work with Beijing.
If successful, the initiative will deepen infrastructure
connectivity and economic integration by boosting crossborder trade, investment and financial flows. It will provide
economic benefits for both China and other countries thatuse or form part of the new transport systems. Thus, theinitiative will likely strengthen China’s importance as an
economic partner for its neighbors and enhance Beijing’s
diplomatic leverage in the region. Greater investment inenergy and mineral resources, particularly in Central Asia,
could also help strengthen China’s energy and resource
security.
Beyond the pursuit of geo-economic interests, China
Asian Infrastructure Investment Bank: China as Responsible Stakeholder? 13

SASAKAWA PEACE FOUNDATION USA

may also use AIIB as an instrument to realize its own
geopolitical objectives, including expanding its sphere ofpolitical and security influence westward through the new
belt and road initiative. Potential adversaries surround
China, with Japan in the east (and the U.S. beyond it),the Philippines and Vietnam in the southeast and India
in the south. Thus, China seeks closer ties with Central
Asian countries through overland routes and with friendly
Southeast Asian, South Asian and Middle Easterncountries through maritime routes. China may use AIIB
in addition to the Silk Road Fund (and even the BRICS’
New Development Bank) to expand its geopoliticalinfluence. Although Beijing has not yet imposed any
preconditions, special commitments or requirements on
the Silk Road nations with which it works, some nations
believe that China has significant political, security andmilitary motives underlying the initiative (Wang 2015).
For example, while India is the second largest
shareholder in AIIB, it has yet to accept the One Belt, One
Road initiative. India has not supported the Maritime Silk
Road, nor has it welcomed the China-Pakistan plans for an
economic corridor, both of which are part of the Silk Road
Economic Belt project (Panda 2015). India seems to want
to impede these Chinese projects from inside AIIB, as it
can accept China’s rising economic clout but not Beijing’s
play for geopolitical influence and the possible creation of
a “China-centric” order in the region.
China’s recent, aggressive moves to reclaim land on
disputed reefs in the South China Sea to build militaryfacilities have led many observers to believe that it will
be difficult to convince China to change its geopoliticalbehavior once it puts a policy firmly in place. China’s
actions suggest that it is not interested in cooperating withneighboring countries on territorial issues and will pursue
its strategic interests regardless of opposition by othercountries.

14 Asian Infrastructure Investment Bank: China as Responsible Stakeholder?

4. MAJOR ISSUES FOR AIIB
AIIB faces several major issues, including its vision,
governance, lending policies and standards, human capitaland expertise and coordination with stakeholders.

(1) Vision
AIIB needs to develop its core philosophy and principles
because it is unclear what the bank’s ultimate goal is orwhat sort of vision it seeks for Asia. Unlike the World Bank
and ADB, AIIB does not seem to regard poverty reduction
as its goal. While an MDB does not have to limit itself topoverty reduction, any new international organization
should articulate its vision. Infrastructure development,
reinforcement of infrastructure connectivity, regional
economic integration and even economic development are
only the means to achieving some ultimate goal.
Common challenges facing many Asian developing
countries can inform AIIB in developing such a vision. For
example, developing countries in Asia have experienced
severe environmental degradation (deforestation andcontaminated air, water and land) in the process of rapid
economic development, and need to ensure that theenvironment is protected as economic development
proceeds. In addition, although absolute poverty has
been reduced by rapid economic growth, income andsocial disparities have widened in many Asian countries.
This suggests that future economic development should
aim to be broad-based and inclusive, providing equal
opportunities for all.
Many developing countries in Asia have also faced
inadequate delivery of public sector services and persistentcorruption among officials and politicians. These
problems suggest that those countries need to strengthen
public sector governance, enhance public service delivery
and curb corruption.
AIIB might aim to address these challenges byfocusing on environmental sustainability, inclusive growthand better governance. China may want to add some
Chinese flavor to these objectives. However, without aclear vision and well-articulated goals, AIIB will find it
difficult to select and implement appropriate infrastructure
projects. Worse, outsiders might fear that China’s ultimate

SASAKAWA PEACE FOUNDATION USA

objective in forming AIIB is to create a China-centric Asia
dominated by Chinese interests and influence.

(2) Governance
The governance structure of any MDB is key to its
decision-making, operational efficiency and accountability
to shareholder governments. In the case of AIIB, with its
headquarters in Beijing, its first president a Chinese citizen
and China holding a significant share of voting powers,
one can expect its strong influence over AIIB governance.
To ensure that the bank will function as a neutralinternational organization, the allocation of voting powers
among member countries, which is basically determinedby the allocation of capital subscriptions, should bebalanced and the power of the board of directors should
be strong.

Capital Subscription and Voting Shares
AIIB’s allocation of capital subscriptions across countries
is determined by GDP. Reportedly, prospective founding
members agreed to use a combination of current U.S.dollar GDP (converted at market exchange rates) andcurrent international-dollar GDP (converted at purchasing
power parity rates) to calculate the economic size ofindividual members and, hence, capital subscriptionsand voting powers.10 Table 2 summarizes the agreed
and estimated shares of capital subscriptions and voting
powers across member economies under three different
scenarios. The first scenario is based on the assumptionthat all 57 countries will become founding members,
even though seven countries had yet to sign the Articles
of Agreement as of the end of June. The second scenario
assumes Japan’s participation in AIIB. The third includes
both the United States and Japan in the bank.
The first scenario is summarized in the first threecolumns of the table which show that, with the current
membership, China has the dominant share of capitalsubscriptions at 30.3%, followed by India (8.5%), Russia(6.7%), Germany (4.6%) and the Republic of Korea
and Australia (3.8%). The European member countries
10

Specifically, a 60% weight is assigned to current U.S.-dollar GDP and a 40%
weight to current international-dollar GDP.

collectively have 20.7%. The allocation of voting powers
follows the pattern of capital subscriptions shares: China
has the largest voting share at 26%, giving it effective vetopower over critical issues,11 followed by India (7.5%),
Russia (6.5%) and the Republic of Korea and Australia(3.5%). Thus, no single country can challenge China. Even
if the European countries, with a collective voting share of
22%, form a united position, they cannot rival China.
China’s voting share is far larger than any held by
the largest countries at the existing international financial
institutions with the exception of IDB. The UnitedStates holds a 16.8% share at the IMF and 16.5% at theWorld Bank, while both Japan and the United States
hold 12.8% at ADB.12 At IDB, the U.S. share of 30%
exceeds China’s share at AIIB. It is well known that theUnited States exercises strong influence over IDB, which
is headquartered in Washington, D.C., even though itspresidents have always been Latin Americans. Given
China’s dominant voting share at AIIB, together with thebank’s headquarters in Beijing and a Chinese national
serving as its first president, one may conclude that AIIB
will be strongly influenced by China.
The balance of shares would change if Japan joined
AIIB. The next three columns of the table show thereallocation: Japan’s capital and voting shares would be
11% and 10%, respectively, while China’s shares would
drop to 26% and 23%. Thus, Japan’s participation would
effectively strip China of its veto power. Nonetheless Japan,
alone, could not rival China in capital or voting shares,
though it could challenge China by uniting with Europe,as the sum of Japanese and European shares would
exceed those of China. Indeed, Japan and Europe could
exercise veto power if they acted jointly. Essentially, Japan’s
participation could block certain Chinese moves thatmight be contrary to the interests of the West.

11

Decisions on critical issues – such as changes in the Articles of Agreement,
an increase in total capital subscriptions, election of the bank president andtermination of bank operations – will require a supermajority vote of the boardof governors, that is, an affirmative vote of two-thirds of the total number ofgovernors, representing not less than 75% of the total voting power of themembers (Article 28 of the Articles of Agreement).
12
Thus the United States has veto power at both the IMF and the World Bank,
which requires 15% of total voting powers. Japan and the United States together
have veto power at ADB, which requires 25% of voting powers as in the case of
AIIB.

Asian Infrastructure Investment Bank: China as Responsible Stakeholder? 15

SASAKAWA PEACE FOUNDATION USA

TABLE 2

Shares of Capital Subscriptions and Voting Powers for AIIB Members
Agreed amounts and shares

Estimated amounts and shares

Current membership (57)
CapitalSubscr.
($ Bill)

Capital Share(%)

Regional

75.0

China

29.8

Japan

Participation by Japan

Voting Share(%)

CapitalSubscr.
($ Bill)

Capital Share
(%)

75.0

73.2

90.3

30.3

26.1

29.8

--

--

--

India

8.4

8.5

Russian Fed.

6.5

6.7

Korea, Rep. of

3.7

Australia

3.7

Indonesia
TurkeyParticipation by Japan & US

Voting Share(%)

CapitalSubscr.
($ Bill)

Capital Share(%)

Voting Share
(%)

78.2

76.4

108.3

70.2

70.0

26.3

22.7

35.7

23.6

20.5

12.8

11.3

9.8

15.3

10.1

8.9

7.5

8.4

7.4

6.6

10.0

6.6

5.9

5.9

6.5

5.8

5.2

7.8

5.2

4.7

3.8

3.5

3.7

3.3

3.1

4.5

3.0

2.8

3.8

3.5

3.7

3.3

3.0

4.4

2.9

2.7

3.4

3.4

3.2

3.4

3.0

2.8

4.0

2.7

2.5

2.6

2.7

2.5

2.6

2.3

2.2

3.1

2.1

2.0

Saudi Arabia

2.5

2.6

2.5

2.5

2.2

2.2

3.1

2.0

2.0

Chinese Taipei

—

—

—

1.7

1.5

1.5

2.1

1.4

1.4

Iran, Islam.R.of

1.6

1.6

1.6

1.6

1.4

1.4

1.9

1.3

1.3

Non-regional

25.0

25.0

26.7

25.0

21.8

23.6

45.4

29.8

30.0

United States

—

—

—

—

—

—

20.4

13.5

11.8

Western Europe

20.3

20.7

22.1

20.3

17.9

19.5

20.3

13.4

15.5

Germany

4.5

4.6

4.1

4.5

4.0

3.6

4.5

3.1

2.8

France

3.4

3.4

3.2

3.4

3.0

2.8

3.4

2.4

2.1

U. K.

3.1

3.1

2.9

3.1

2.7

2.5

3.1

2.1

2.0

Italy

2.6

2.6

2.5

2.6

2.3

2.2

2.6

1.8

1.7

Spain

1.8

1.8

1.8

1.8

1.6

1.6

1.8

1.2

1.2

Brazil

3.2

3.2

3.0

3.2

2.8

2.6

3.2

2.2

2.0

Note: (a) To estimate the capital subscriptions share when Japan and/or the U.S. participate(s), 2013 data for current U.S.-dollar GDP (converted at market
exchange rates) and current international-dollar GDP (converted at purchasing power parity rates) are used. A 60% weight is given to the former and a 40%
weight is given to the latter.
(b) To estimate the voting power shares, 600 shares are allocated to all prospective founding members, and 12% of total voting powers are equally divided
and allocated to all members, including new (or ordinary) members.
(c) When both Japan and the United States join AIIB, the regional members’ capital subscriptions are assumed to rise by 20% so that the collective capitalsubscription share of regional members does not drop below 70%.
(d) Figures for China do not include those for Hong Kong SAR. When Japan participates, both Chinese Taipei and Hong Kong SAR are also assumed to join.
Source: Author’s computation using GDP data from the IMF World Economic Outlook database, April 2015 and information from AIIB (2015).

16 Asian Infrastructure Investment Bank: China as Responsible Stakeholder?

SASAKAWA PEACE FOUNDATION USA

U.S. participation in AIIB would likely change theallocation of capital and voting shares for Asian regional
members as well, even though the United States would bea non-regional member. U.S. participation would raise theshare of non-regional members’ total capital subscriptions
in a significant way, which could prompt an increase incapital subscriptions of regional members to keep theircollective share at 70%.13 The final three columns of
the table present a scenario in which both Japan and theUnited States join AIIB. They show that the United States
would secure a 13.5% capital share and a 12% voting
share, while Western Europe’s collective capital share
would decline to 13% and its voting share to 15.5%. The
participation of both the United States and Japan would
make them the second and third largest shareholders of
AIIB, with the sum of their voting shares roughly equal tothat of China’s (20.5%). As a result, they could be vocal at
AIIB and affect China’s behavior particularly when theywork with the European countries, Australia and New
Zealand.
One needs to be cautious, however, about such a
possibility. First, there is no guarantee that the interestsof Japan, the United States, Europe, Australia and New
Zealand would align within AIIB. After all, several
European countries – the UK in particular – decided to
become founding members of AIIB out of economic selfinterest, despite the G7’s united, cautious position toward
the new bank. Second, the collective voting share of thesewestern countries would be almost 40%, quite sizable, but
far less than emerging Asian countries’ total voting share ofmore than 57%. China could join forces with Russia, Iran,Central Asian countries or members of the Association ofSoutheast Asian Nations to overrule a coalition of Japan,
the United States and Europe (plus Australia and New
Zealand). Essentially, AIIB is a bank owned and controlled
by Asia’s emerging and developing countries, whether
Japan and the United States join or not, and thus thedeveloped countries’ influence could be limited.

13

It has been reported that China will ensure that the share of regional members’
capital subscriptions would not go below 70% in the future. If the share ofcapital stock held by regional members were to go below 75% of the total
subscribed capital stock, a supermajority vote of at least 75% of voting shareswould be required.

Board of Directors
The governance structure of AIIB is similar to that ofother major MDBs – the World Bank, ADB, AfDB, EBRD
and IDB. It will have a board of governors and a boardof directors, which will make key decisions and monitor
the management, headed by the president, to ensure thatthe bank operates in the best interests of shareholder
governments. All powers will be vested in the board ofgovernors, whose main responsibilities will be to: (i)determine changes in membership, (ii) elect the president,(iii) determine reserves and net income allocation, (iv)increase or decrease authorized capital and (v) amend
the Articles of Agreement. However, unlike other major
MDBs, the board of directors will be non-resident – notlocated in the headquarters. All current major MDBs
have permanent resident boards of directors at their
headquarters, with the power to approve or disapproveeach loan and investment proposal. Instead, the powersof the AIIB board of directors will be limited to: (i)establishing policies, (ii) supervising the management andoperations and (iii) approving the strategy, annual planand budget (AIIB 2015). The plan seems to be for theboard of directors to meet only several times a year, guidethe bank’s strategic direction and leave routine operation
to the management. The Articles of Agreement do notmention the power of the board of directors to approve ordisapprove individual loan proposals. It is possible thatsuch power may be delegated to the management.
The management will conduct daily business inaccordance with AIIB’s delegated authority. It will
be assisted by the credit and investment committee –consisting of management and senior staff of the bank –which will be responsible for investment decisions.
A resident board of directors would allow close
information exchange among the board members and withthe management and staff of the bank. Resident board
members, as representatives of shareholder governments,
would also be able to more closely monitor management
and operations. The absence of a resident board has theadvantage of reducing operating costs with regard to theboard and accelerating decision-making as in the case of
CAF. Speed is important, as the existing MDBs have been
criticized for taking too long to make loan and investment
Asian Infrastructure Investment Bank: China as Responsible Stakeholder? 17

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decisions and implement projects.
The downside risk is that management is left with toomuch power and discretion, particularly in deciding which
infrastructure projects to finance and how they should be
carried out. Infrastructure financing priorities and impact
assessments of infrastructure projects could be different
across member governments, and significant discussions
among board members would be needed for contentious
projects.
Without due consideration of governance issues,
China could select only those projects it wanted to promotein friendly countries, thus using AIIB mainly to pursue its
own interests. In addition, China might use AIIB to provide
more assistance to a particular country, complementing its
bilateral assistance. It would not help China’s reputation
if the international community viewed Beijing as using
AIIB to maximize its own economic and political interests.
To avoid such negative perceptions, China should
clearly demonstrate to the rest of the world that AIIB will
maximize benefits for all members. Toward this end, China
should foreswear veto power and provide the board of
directors with maximum powers and authorities.

(3) Lending Policies and Standards
Another important issue is the kind of lending policies andstandards AIIB will adopt. As a bank, lending decisions
must be made in a financially sound manner, considering
the economic viability of projects and the borrowing
countries’ ability to repay. Given the potentially significant
impact of infrastructure projects on the environment andinhabitants within and nearby project sites, appropriate
safeguards must be adopted in order to mitigate negativeenvironmental and human consequences. In addition, atransparent procurement process is required to reduce
project costs and eliminate corruption.
AIIB is expected to aim at instituting international
best practices on these issues, but questions remain.
Chinese Finance Minister Lou Jiwei, for example, often
says that the practices of the World Bank and ADB are
not always best suited to developing countries, suggestingthat China may compromise on rigorous policies and highstandards in favor of faster, less bureaucratic procedures orless stringent safeguards.

18 Asian Infrastructure Investment Bank: China as Responsible Stakeholder?

Sound Banking
Infrastructure investment is characterized by large initial
capital commitments, long gestation periods, a variety ofrisks (project risk, market risk, commercial risk, politicalrisk) and the presence of many stakeholders (potential
users of infrastructure services, several levels of government,
potential operators and creditors, affected inhabitants).
Thus, the decision to lend for infrastructure investment
requires expertise in developing bankable projects,
conducting project screening and appraisals, managing risks
and working with stakeholders. Such expertise cannot be
acquired overnight. The question remains as to whether
AIIB will have the requisite expertise to make financiallysound loan and investment decisions.
China’s domestic banking system is dominated bylarge, state-owned commercial banks that extend loans
largely to state-owned enterprises, without much due
diligence on borrowers. The recent expansion of local
government debt and shadow banking suggests thatthe financial market lacks expertise in the areas of credit
analysis, financial risk assessment and risk management.
Externally, China’s policy increased their exposure to highrisk borrowers, such as Ukraine, Venezuela and Zimbabwe,in the early 2000s. Some of these loans are now in arrears,
with possible defaults on the horizon (Wihtol 2015). China’s
lenders seem to be learning the importance of conducting
due diligence, assessing risks of potential borrowers andmonitoring borrowers’ financial conditions. It is essentialthat the AIIB will be backed by a strong culture of credit andbanking.
When a developing country borrows from AIIB for
infrastructure investment, external debt burdens pile up.
Once a country’s external debt reaches a level beyond
its capacity to repay on a sustainable basis, it may fail tomake debt repayments not only to AIIB but also to other
lenders, such as the World Bank and ADB. Thus, it isessential that AIIB’s lending decisions be based on soundcredit and debt sustainability analysis. IMF conducts
debt sustainability analysis of its member countries; AIIB
should make use of IMF’s analysis in making decisions on
infrastructure financing for its members.

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Environmental and Social Standards
Concerns are often expressed over the environmental
and social standards that AIIB will adopt in financing
infrastructure projects. Low standards could encourage
destructive development that leads to environmental
degradation or threatens the human rights of inhabitants inor near a project site.
Existing major MDBs, such as the World Bank and
ADB, consider the environmental and human impacts
of infrastructure projects. Projects, particularly largescale ones, can have significant, negative impacts on theenvironment and sometimes can require inhabitants torelocate. If an MDB handles these issues poorly, it may
severely damage its reputation. Therefore, major MDBs,
like the World Bank and ADB, tackle these issues fromthe start of a project by taking measures to mitigate risks,rather than only responding to problems when they arise.
The major MDBs believe that such a cautious approach
maximizes the probability of success and minimizes
project risks. At the same time, it increases the procedures
required for, and time devoted to, project preparation.
Developing countries tend to view the environmental
and social standards adopted by the World Bank and ADB
as overly rigorous, making compliance difficult for nations
with institutional, capacity and financing constraints.
Thus, some infrastructure projects desired by developing
countries may not be implemented because the countries
are unable to comply with the strict standards. If AIIB
finds it useful to carry out such projects using lower
standards, it should also provide technical assistance tohelp the borrowing countries improve their institutions
and capacity, so they can comply with higher standards inthe future. From this perspective, AIIB should consider
establishing a trust fund for technical assistance to improve
national environmental and social standards.

Procurement
Procurement for any publicly supported infrastructure
project can be a breeding ground for corruption. To
prevent corruption and maintain a level playing field for
all firms concerned, it is critical that tender rules be highly
transparent. Both the World Bank and ADB require
such transparency as well as competitive bidding to limit

resources flowing into the hands of corrupt people. Such
practices also help to avoid waste and reduce project costs.
At AIIB, procurement will be open to all firms,
whether they are from member countries or not. This is acommendable practice, but it would also be desirable thatfirms from non-member countries not face discriminationin collecting information and making tenders.

(4) Human Capital and Expertise
Human capital and expertise are essential for the successof any MDB. There is some concern that AIIB may notstart with adequate human capital and expertise. It has
been reported that AIIB has already recruited seasoned
experts from the World Bank and other institutions on
legal matters, integrity, safeguards and procurement. Thisis good news. But what matters is the quality of operational
staff on the ground. Without high-quality staff it is hard tobuild bank creditworthiness and functional competence.
For example, to raise sufficient funds at low cost in theinternational capital markets, AIIB would have to be rated
highly by private credit rating agencies. For this purpose,experts are needed in portfolio and exposure management,risk management and mitigation and loan and investment
quality assessment.
A typical lending cycle for any MDB consistsof: (i) project proposal, (ii) internal assessment, (iii)bank authorization, (iv) project implementation and(v) post-project evaluation. At each step, expertise isrequired in project design, implementation, evaluationand environmental and social safeguards. A potential
borrowing country first submits a detailed proposal to thebank, which includes: expected, positive developmental
impacts; expected environmental risks and negative
impacts on people (inhabitants, the poor, women andindigenous people); and proposed measures to mitigate
such risks and impacts. The bank makes an internal
assessment of the proposal, which takes into account theborrower’s capacity to carry out its financial obligations
under the loan agreement and the relative merits oftechnical, economic and developmental impacts versus
potential risks and negative consequences. Once a project
proposal is deemed sound, bank authorization is soughtby going to the board of directors (or the management in
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some case). While the borrowing country implements the
project, the bank reviews progress, monitors compliancewith bank policies and ensures that funds are used asintended. An internal evaluation unit often conducts apost-project evaluation to determine the extent to which
the project has or has not met its objectives, and the unit
reports its evaluation to the board of directors or the
management.
Experts are needed at every stage of the project cycle,
but such expertise is not widely available and must often
be procured in professional markets in the United States,
Europe, Japan and other developed countries. Perhaps thebest sources for human capital and expertise are the existing
MDBs and financial firms engaged in project financing.

(5) Coordination with Other Stakeholders
To improve the effectiveness of financing assistance, theborrowing country should design and implement its
own strategy for economic development, while seeking
assistance from multilateral and bilateral development
agencies. And all the development agencies should
coordinate, as economic development requires acomprehensive national strategy as well as strategies for
major sectors of the economy, such as transport, energy,
water, sanitation, ICT, education, health and agriculture.
A developing country government needs to decide which
infrastructure projects are most productive in achieving
the strategy for each particular sector. Such decisions
require consultation and dialogue between the developing
country government and development agencies as well as
coordination among development agencies. Essentially,a single infrastructure project cannot add much value
unless it is fully integrated into the strategy for the relevant
sector. To that end, AIIB can avoid investment duplicationand create synergies by working with other multilateralagencies (such as the World Bank and ADB) and bilateralagencies (such as the Japan International Cooperation
Agency [JICA], the Japan Bank for International
Cooperation [JBIC], Korea International Cooperation
Agency and the Australian Agency for International
Development).
China is not a member of the Organisation for
Economic Cooperation and Development’s (OECD)

20 Asian Infrastructure Investment Bank: China as Responsible Stakeholder?

Development Assistance Committee, which tracks theflows of official development assistance and coordinates
development assistance policy across donor countries.
China takes the position that, as a developing country, itdefines its support for developing countries as “southsouth cooperation,” rather than development assistance,and does not coordinate with traditional donors (Wihtol
2015). For AIIB to operate successfully, China will be
under pressure to adjust its position. The European andOceanic members are likely to push AIIB to participate
in international mechanisms to coordinate development
assistance.
Strengthening coordination with the existing MDBs,
such as the World Bank ADB, would be particularly usefulfor AIIB. In its early stage of operations, developing apipeline of its own projects will be a challenge. Indeed,
AIIB would likely find it beneficial to participate in joint
financing of projects already developed by the WorldBank or ADB, so that AIIB could disburse loans while
meeting the high environmental and social standards set
by the existing MDBs. To the extent that the World Bank
and ADB save funds as a result of co-financing, these
institutions can develop more projects with high-quality
standards.14
Such coordination between AIIB and the existing
MDBs would prevent an unproductive race to thebottom in terms of standard setting. In this way, AIIB
could support Asian developing countries’ efforts toachieve environmentally sustainable and socially inclusive
development.

5. OPTIONS FOR JAPAN(1) Reasons for Japan’s Decision Not to Join AIIBJapan decided not to sign the Memorandum ofUnderstanding on Establishing the AIIB, stayed awayfrom Articles of Agreement negotiations, and did notconsider signing the Articles of Agreement for at least threereasons: lack of trust and communication, concerns over
governance and geopolitical misgivings.
14

At the same time, the World Bank and ADB may further strengthen theircoordination in areas of support for middle-income countries, including policy
advice and governance reform (Nehru 2014).

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Lack of Trust and Communication
The two countries’ leaders – Japan’s Shinzo Abe andChina’s Xi Jinping – have never held a bilateral summit
since they assumed office in 2012 and 2013, respectively.
Relations between the two countries have been poor
since 2012 when Japan nationalized the Senkaku Islands(known as the Diaoyu Islands in China). The history issue
has also been a negative factor. The two leaders met only
briefly and informally in November 2014 at the Beijing
Asia-Pacific Economic Cooperation (APEC) Summit
and in May 2015 at the Bandung Conference, and Xi
reportedly invited Abe to join AIIB in Bandung. But they
have not had an opportunity to discuss details of AIIB,
Asia’s development issues, the challenges Asia and the twocountries face or their visions for the future of Asia.
The two countries’ finance ministers – Japan’s TaroAso and China’s Lou Jiwei – have not held frequentmeetings to exchange views on either AIIB or how the twocountries can work together on economic and financial
issues. It was in early June 2015 that the two ministers
met for the first time to discuss issues of mutual interest
and possible cooperation. They agreed to promote
infrastructure investment in Asia, including throughdevelopment financial institutions, and Lou reportedly
said to Aso that the door was open if Japan wanted tojoin the new bank. However, the two seem not to haveexchanged views over Japan’s deep doubts over thefunctions and roles of AIIB.
The lack of trust and communication has led theJapanese to believe that China might want to exclude
Japan from AIIB. If there was any invitation from China
at the ministerial level or higher, it came too late. Japan
doubts whether AIIB will maintain transparency in its
decision-making and operations or in its capacity to
conduct adequate due diligence of loan projects. These
concerns have also contributed to Japan’s indecisivenessabout joining the bank.

Concern over Governance and Lending Policies
and Standards
Finance Minister Aso has expressed his concerns
over AIIB’s “uncertain nature of bank governance,
environmental and social standards associated with
infrastructure projects and considerations for debt

sustainability in borrowing countries, which should follow
internationally established best practices.” While not statedas directly, he seems to be concerned that AIIB might becontrolled by China through its dominant voting powers
and the absence of a resident board of directors, that AIIB
might adopt low environmental and social safeguards,
and that it might extend loans without sound appraisal of
projects and countries.
In addition, Japan is concerned that, by adopting alenient stance towards the financial viability of projects andenvironmental and social standards, AIIB could put itself
in an advantageous position relative to the existing major
MDBs, particularly the World Bank and ADB, as potential
borrower countries would prefer fewer requirements
and lower standards. Thus, potentially bankable projects
developed by the World Bank and ADB might be taken
away by AIIB, thereby putting pressure on the former
to reduce their own standards. Japan does not want tosee such a race-to-the-bottom competition on lending
standards.
One way to push AIIB to adopt high standards would
be for Japan to join AIIB and influence its decision-making
from within. The problem is that Japan is not sure if itwould have a sufficient voice to do so, given an estimatedvoting share of only 9%. Thus, Japan does not seem towish to join AIIB unless it is confident that the bank will
be well governed, financially sound and ready to adopt
high environmental standards and social safeguards.

Geopolitical Concerns
A potentially more serious concern for Japan is that
China may use AIIB as an instrument for realizing its
own economic and geopolitical objectives, including
expanding China’s sphere of influence westward throughthe New Silk Road initiative. AIIB may serve to create a
Sino-centric economic and political sphere of influence,
particularly in Central Asia and part of South Asia.
Japan’s concerns have been reinforced by China’s
aggressive behavior in the East and South China Seas inrecent years. In the East China Sea, the territorial issue
surrounding the Senkaku Islands has made bilateral security
relations unstable. In November 2013, China introduced
the East China Sea Air Defense Identification Zone,
covering the airspace of the Japanese controlled Senkaku
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Islands, and imposed new air traffic restrictions. The
new restrictions require any foreign aircraft in the zone toidentify its flight plan, maintain radio communication with
the Chinese authorities, display its nationality, and follow
the authorities’ instructions. Japan views this as an attempt
to impede freedom of flight in international airspace. In
the South China Sea, Beijing has taken a firm stance on
reclaiming land on disputed reefs and building militaryfacilities. Despite increasing concerns expressed by theUnited States, the Philippines and other countries, China
has not slowed its reclamation efforts. Many observers
believe that China’s behavior is an attempt to change thestatus quo through coercion. The aggressive behavior
has created mistrust and apprehension about Chinese
geopolitical intentions. There is a growing sense in theregion that China is not interested in resolving territorial
issues in a peaceful manner, and that it will pursue its
strategic interests regardless of views held by neighboring
countries.
Through AIIB, China could direct its rising economic
and financial power to help strengthen infrastructuredevelopment, cross-border connectivity and economic
integration. But China’s aggressive behavior on territorial
issues has led Japan to suspect that China’s true intentionin establishing AIIB might be to expand China’s
economic, political, security and even military spheres ofinfluence in Asia.

behavior in AIIB as China’s economic and financial power
continues to grow.
From an international perspective, AIIB can provide
an opportunity for China to play a leadership role in
the provision of international public goods. As a rising
economic and financial power, China is expected toassume a greater burden in supporting global and regional
prosperity and stability. AIIB provides an excellent test
case of China’s true intentions in helping to develop Asia’s
infrastructure and of its willingness to collaborate with theinternational community and the existing international
financial order.
More specifically, the benefits of Japan’s participationin AIIB would include:(2) Pros and Cons of Japan’s Participation• Limiting China’s voting power by coordinating with
Europe, Australia, New Zealand and like-minded
developing member countries, thus prodding China
toward pursuing cooperative behavior;• Raising AIIB’s quality of governance, credit andbanking culture and environmental and social
standards;• Creating synergy with the existing major MDBs,
such as the World Bank and ADB, in the form of
co-financing and joint project preparation andsupervision;• Positioning Japan as a reliable partner in Asia’s
infrastructure building and economic development;• Ensuring adequate flows of information to Japanesebusinesses on infrastructure projects financed by AIIB.

Japan should decide to join AIIB based on carefulconsideration of the pros and cons of participation.

Costs of Participation

Benefits of Participation
Given that AIIB is an Asian MDB focusing on Asia’s
infrastructure development, with a potential for setting
its own standards, Japan as the second largest economy
in the region has a natural interest in influencing the newbank. In addition, various members of AIIB, particularly
ASEAN member states, want Japan to participate in thebank to help protect their interests by counterbalancing
China’s influence. Moreover, if Japan does not join
AIIB, Tokyo’s relative weight in Asia might diminish.
Japan could also encourage China to pursue rules-based

22 Asian Infrastructure Investment Bank: China as Responsible Stakeholder?

The cost of Japan’s participation in AIIB would be greatest
if China uses the bank mainly to pursue its own economic
and geopolitical interests. In that case, Japan might not
be able to constrain China’s behavior through AIIB’s
decision-making process, as emerging and developing
countries will essentially run the bank, and some of thosecountries will side with China. The second greatest
cost would be incurred if AIIB were run in a financially
imprudent manner, as the resulting non-performing loans
would damage capital and lead Japan to lose tax revenue(about $2 billion as paid-in capital).
Other costs of Japan’s participation would result if

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China uses AIIB:• As an instrument of foreign policy to expand its geoeconomic and geopolitical sphere of influence;• To give its political leadership greater legitimacy,
thereby winning diplomatically over Japan, as Tokyo
would be a junior partner to Beijing at the bank;• To reduce the relative importance of ADB as AIIB
enters a similar area of operation;• To support indirectly China’s One Belt, One Road
initiative.

(3) Japan’s ChoiceThis analysis has shown that Japan’s decision to join AIIB
should depend on the following considerations:• Does AIIB have a clear vision for the sort of Asia it
wants to realize, and is that vision consistent withJapan’s? More specifically, does China want to use
AIIB to help provide international public goods andcontribute to the prosperity and stability of Asia, or toachieve its own economic and geopolitical interests andexpand its sphere of influence?
• With China’s unduly large voice in AIIB, can Japansecure an appropriately strong voice when it joins?
• Can the board of directors be made resident in Beijingwith maximum decision-making powers, including
powers to approve or disapprove major loan projects(and other projects judged important by the board)?
• Will AIIB be willing to set high standards on loan
appraisals and project screening, environmental andsocial safeguards and procurement rules? If AIIB
provides loans without high environmental andsocial standards, will it have a mechanism to offset
the impacts in the medium term (for example, by
providing technical assistance for capacity building
through trust funds)?
• Will AIIB be ready to work with the existing MDBs,
such as the World Bank and ADB, through cofinancing and other joint activities?
To summarize, if China provides international public
goods through AIIB, rather than pursue its own policy
objectives, and if the bank is run in a financially prudent
manner with sufficiently high environmental and social

standards, Japan should join.15 However, if China uses
AIIB mainly as an instrument to realize self-interested
economic and geopolitical objectives, Japan should refrainfrom joining. If Japan cannot adequately assess theseissues, it should wait and see how AIIB operates, while
encouraging the World Bank and ADB to help AIIB
become operationally sound.

Japan’s Recent Infrastructure Assistance Initiative
Prime Minister Abe is, indeed, taking such a wait-and-see
approach. At the same time, Japan has launched a new
infrastructure assistance initiative in collaboration with
ADB to increase funding for “high-quality” infrastructure
projects in developing Asia to $110 billion over the next
five years (2016-2020), which would be a 30% increase
relative to the previous five years. In addition to working
closely with ADB, Japan will mobilize all forms ofdevelopment cooperation and strengthen the role of JBIC.
The Japanese government will also expand its assistancefor infrastructure development in Asian countries inpartnership with the private sector, providing more than
JPY4 trillion ($33 billion) over the five-year period. JICA,
in cooperation with ADB, will establish a new funding
mechanism for private sector infrastructure projects.
JBIC will actively take greater short-term risks associatedwith infrastructure financing, without requiring recipient
governments’ sovereign guarantees.

6. CHALLENGES FOR CHINA AND THE
INTERNATIONAL COMMUNITY(1) Challenges for China
Once AIIB is established, Beijing will be under intenseinternational scrutiny to deliver results. China cannot
afford AIIB’s failure, as the country’s highest politicalleadership has driven the AIIB initiative. Indeed, if the15

Bergsten (2015) calls for the U.S. to reverse course and join AIIB with aminority share. Lipscy (2015) also argues that the United States should prefer aworld in which China seeks to establish its influence and international prestige
by building multilateral development banks rather than one in which it seeks to
do so by building military capabilities. But, it is not clear if the U.S. endorsementof AIIB will limit China’s aggressive behavior, for example, in the South China
Sea. At any rate, it remains highly unlikely that the United States will join AIIB
for the time being, given the politics of approving funds for subscription sharesfor the bank as well as views of China in Congress, which has yet to approve IMF
reforms that would give China a larger voice in that institution.

Asian Infrastructure Investment Bank: China as Responsible Stakeholder? 23

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bank were to fail, China’s reputation and clout as an
emerging global power would be seriously damaged. To be
successful, China has to ensure that AIIB does not becomea Chinese fiefdom, but rather conforms to international
norms and standards of transparency (Acharya 2015).
Essentially, running an international financial
institution requires transparency of decision-making,accountability to shareholders, coordination of different
international stakeholders and consideration of theenvironmental and social dimensions of infrastructure
projects. But these considerations are foreign to China’s
political and social system. In addition, running a bankrequires a strong credit and banking culture, which
China’s state-bank-dominated financial system lacks.
Acharya (2015) argues that, for China to succeed
with this venture, the country needs to make significant
adjustments to its regional policy by abandoning its
expansive territorial claims and enhancing its militaryand economic transparency. Absent such changes, itwould be difficult to establish trust with the many other
AIIB members who are apprehensive about Beijing’s
geopolitical intentions. If this optimistic argument iscorrect and China adjusts its policies, any resulting successof AIIB would mean that not only China but also Asia andthe West, including the United States and other countries
which have invested in the current system of global
governance, would all be winners.
This suggests that AIIB management must promote
the transparency of its governance and effectiveness ofoperations, and that China’s highest political leadershiphas to take a more conciliatory approach to neighboring
countries on territorial disputes and issues in the Southand East China Seas.

(2) Reform of the Existing International
Financial Institutions
The existing international financial institutions also needto reform themselves to serve their member countries more
fairly. Indeed, ADB has introduced four major reforms.
First, it has decided to expand its financial capacity bymerging its Asian Development Fund’s lending operations
with its Ordinary Capital Resources. This innovative

initiative is expected to increase ADB’s annual operations
by 50%, from $14 billion in 2014 to $20 billion in 2017.
The greater financial capacity will allow ADB to increase
its support for sustainable development and poverty
reduction in the region. With the United Nations’ post2015 Sustainable Development Goals and a global pact on
climate change (expected to be ratified this year), ADB will
scale up support for sustainable infrastructure, education,
health and actions to combat climate change.
Second, ADB has decided to make loan decisions
faster, without compromising project quality andstandards for safeguards and procurement. The average
length of internal processing time for loan proposals has
been two to three years. Through internal reforms, suchas delegating more authorities to country offices where
projects take place, the bank can halve the processing time
for procurement contracts.
Third, ADB will double assistance for education andhealth in line with its Midterm Review of Strategy 2020.
ADB will expand its support for quality education with
an emphasis on higher education and vocational training.
The bank will focus health assistance on improving thedelivery and efficiency of health services and systems,
including promotion of universal health coverage.
Fourth, it will strengthen its support for public-private
partnerships (PPPs) to accelerate the flow of private funds
to critical infrastructure projects in developing Asia.
For example, ADB has signed a co-advisory agreementwith eight global commercial banks to help developing
country governments develop PPP capacity to deliverbankable transactions, without crowding out private sector
advisors.16 Under the agreement, ADB and the eight banks
will provide independent advice to governments on how toassess the future income flows of projects, structure PPPs
to make them attractive to the private sector and manage
the subsequent PPP bidding process.
In addition to these reforms at ADB, the existing
international financial institutions should adjust voting
shares to reflect the change in the economic and financial
weight of emerging and developing countries; otherwise,
the institutions’ legitimacy will be in doubt. As a first step,
16

The eight global commercial banks are Bank of Tokyo-Mitsubishi UFJ, BNP
Paribas, Credit Agricole CIB, HSBC, Mizuho Bank, Macquarie Capital, Société
Générale and Sumitomo Mitsui Banking Corporation.

24 Asian Infrastructure Investment Bank: China as Responsible Stakeholder?

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the United States needs to agree to implement the 2010
IMF reform as soon as possible. ADB should also consider
adjusting capital subscription shares and the resulting
voting powers among its member countries. In the longrun, such reforms will lead to a more stable international
financial system in a way that is consistent with the rising
importance of emerging and developing countries in the
global economy.

7. CONCLUSION
This paper characterizes AIIB as a large MDB owned andcontrolled primarily by Asia’s emerging and developing
countries. These countries are trying to mobilize their own
resources to finance their own infrastructure investment
on their own terms. This self-help approach is laudable,
and the international community may find a good reason
to support it.
The paper has argued that, even though emerging
and developing countries own and control AIIB, thebank should strive to establish high standards andtransparency in the areas of decision-making, credit andbanking practices, environmental and social safeguards
and procurement rules. Such high standards would help
strengthen the ability of the emerging and developing
members of the bank to address their domestic challenges
of environmental sustainability, social inclusion andgovernance improvement.
Given that AIIB is heavily dominated by China in
its decision-making and operations, the paper has also
identified two views with regard to the role of the bank,
one positive and one skeptical.
The positive view sees China-led AIIB assisting
Asia’s developing countries in financing infrastructuredevelopment that not only benefits them but also has
positive spillovers to firms and people outside of thesecountries. It finds value in China’s willingness to assume
leadership, and use its growing economic and financial
power, in providing international public goods in theform of strengthened infrastructure development andconnectivity in Asia, and in the opportunity the bankprovides for China to become a responsible international
player.
The skeptical view sees China’s potential to use

AIIB as an instrument for: undermining existing MDBs
– particularly the World Bank and ADB – by adopting
low standards in running the bank; alleviating its own
economic problems of excess capacity, slow growth,and energy and resource insecurity; and expanding its
geopolitical sphere of influence in Asia through the One
Belt, One Road initiative.
From this perspective, it would be prudent for Japan(and, for that matter, the United States) to judge if AIIB
will serve as a productive bank that facilitates the provisionof international public goods, or as a bank that mainly
serves China’s economic and geopolitical interests. Japan,
together with the United States, needs to see if AIIB will be
run as a financially sound bank, whose operations include
adequate environmental and social safeguards.
Given the lessons from IDB’s collaboration with
CAF and other sub-regional MDBs in Latin America,
encouraging the World Bank and ADB to work withAIIB is the right course. It is in the best interest of theinternational community to pull China and AIIB into theexisting international financial order and help make Chinaa responsible international stakeholder.
REFERENCES
Acharya, Amitav. (June 19, 2015). “No Need to Fear the AIIB.”
Straits Times. <http://webcache.googleusercontent.com/
search?q=cache:6xJ397n8FbEJ:www.straitstimes.com/news/
opinion/more-opinion-stories/story/no-need-fear-the-aiib20150619%3Fpage%3D2+&cd=1&hl=en&ct=clnk&gl=us>.
AIIB Multilateral Interim Secretariat. (January 2014). “AsianInfrastructure Investment Bank (AIIB): Frequently Asked
Questions.” Beijing: Asian Infrastructure Investment Bank
Multilateral Interim Secretariat. <http://www.aiibank.org/html/
pagefaq/Background/>.
Asian Development Bank (ADB) and Asian Development Bank
Institute (ADBI). (2009). Infrastructure for a Seamless Asia. Tokyo:
Asian Development Bank Institute. <http://adb.org/sites/default/
files/pub/2009/2009.08.31.book.infrastructure.seamless.asia.pdf>.
Asian Infrastructure Investment Bank (AIIB). (2015). Articles ofAgreement. June. Beijing: Asian Infrastructure Investment Bank
Multilateral Interim Secretariat. <http://www.aiibank.org/html/
aboutus/Basic_Documents/>.
Bergsten, Fred. (March 15, 2015). “U.S. Should Work with the
Asian Infrastructure Investment Bank.” Financial Times. <http://
Asian Infrastructure Investment Bank: China as Responsible Stakeholder? 25

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www.ft.com/cms/s/0/4937bbde-c9a8-11e4-a2d9-00144feab7de.
html#axzz3gN9PjsZc>.
Bhattacharyay, Biswa Nath. (2012). “Estimating Demand forInfrastructure, 2010–2020.” In B. Bhattacharyay, M. Kawai, and R.
Nag, eds., Infrastructure for Asian Connectivity. Cheltenham, UK
and Northampton, US: Edward Elgar.
Chen, Dingding and Jianwei Wang. (2011). “Lying Low No More?
China’s New Thinking on the Tao Guang Yang Hui Strategy.”
China: An International Journal, 09(02), 195-216. <http://muse.
jhu.edu/login?auth=0&type=summary&url=/journals/china/
v009/9.2.chen.html>.
Griffith-Jones, Stephany with David Griffith-Jones and Dagmar
Hertova. (July 2008). “Enhancing the Role of Regional
Development Banks.” G-24 Discussion Paper Series No. 50. New
York and Geneva: United Nations. <http://unctad.org/en/Docs/
gdsmdpg2420081_en.pdf>.
Humphrey, Chris and Katharina Michaelowa. (2013). “Shoppingfor Development: Multilateral Lending: Shareholder Composition
and Borrower Preferences.” World Development, 44, 142-155.
<doi:10.1016/j.worlddev.2012.12.007>.
Linn, Johannes F. (July 1, 2014). “The Evolving Role of Multilateraland Sub-regional Development Banks.” World Politics Review.
<http://www.worldpoliticsreview.com/articles/13890/the-evolvingrole-of-multilateral-and-subregional-development-banks>.
Lipscy, Phillip. (May 7, 2015). “Who’s Afraid of the AIIB.” Foreign
Affairs. <https://www.foreignaffairs.com/articles/china/2015-05-07/
whos-afraid-aiib>.
Nehru, Vikram. (2014). “The World Bank and the AsianDevelopment Bank: Should Asia Have Both?” In Masahiro
Kawai, Peter J. Morgan, and Pradumna B. Rana, eds., New Global
Economic Architecture: The Asian Perspective (Cheltenham, UK andNorthampton, MA, USA: Edward Elgar).
Panda, Jagannath P. (Spring/Summer, 2015). “Alignment Minus
Alliance: India’s China Quandary on Alternative Institution
Building.” Georgetown Journal of Asian Affairs, 2(1), 21-30. <http://
hdl.handle.net/10822/761159>.

26 Asian Infrastructure Investment Bank: China as Responsible Stakeholder?

Prada, Fernando. (2014). “World Bank, Inter-American
Development Bank, and Sub-regional Development Banks in
Latin America: Dynamics of a System of Multilateral Development
Banks.” In Masahiro Kawai, Peter J. Morgan, and Pradumna
B. Rana, eds., New Global Economic Architecture: The Asian
Perspective (Cheltenham, UK and Northampton, MA, USA:
Edward Elgar).
Wang, Zheng. (Spring/Summer, 2015). “China’s Institution
Building: Leading the Way to Asian Integration.” Georgetown
Journal of Asian Affairs, 2(1), 16-20. <http://hdl.handle.
net/10822/761161>.
Wihtol, Robert. (Spring/Summer. 2015). “Beijing’s Challenge to
the Global Financial Architecture.” Georgetown Journal of Asian
Affairs, 2(1), 7-15, <https://asianstudies.georgetown.edu/sites/
asianstudies/files/GJAA%202.1%20Wihtol,%20Robert_0.pdf>.

SASAKAWA PEACE FOUNDATION USA

China and the Evolving AsianInfrastructure Investment Bank
by Yun Sun*

1. INTRODUCTION

S

ince Chinese President Xi Jinping proposed
the establishment of an Asian Infrastructure
Investment Bank (AIIB) during his trip toSoutheast Asia in October 2013, China has
dedicated significant political, economic and diplomaticefforts toward paving the way for a successful initiationof the new financial institution. China has made the
AIIB a priority and pushed for its successful debut by
rallying regional support, broadening the membershipbase, refining the bank’s role and assuaging doubts.
These efforts led to the signing of a Memorandum ofUnderstanding (MOU) on AIIB’s establishment by 21
Asian countries in October 2014 and applications by
57 countries to become founding members of the bankbefore the deadline of March 31, 2015. After five rounds ofintensive negotiations, 50 countries signed the Articles ofAgreement (AOA) for the Asian Infrastructure Investment
Bank on June 29, 2015 in Beijing.
From the beginning, China has had multiple aims
in establishing AIIB. The most important and seemingly
altruistic one has been to help meet the region’s need forincreased infrastructure development funds. In Chinese
coverage of the issue, the creation of AIIB has also beenclosely related to China’s “One Belt, One Road” strategy,
which aims to use infrastructure projects to export China’s

excess capacity, promote trade and project influenceabroad. In addition, AIIB represents part of China’s
effort to “democratize” the international order, and has
been described as Beijing’s “first serious challenge to the
U.S.-led global economic order established at Bretton
Woods 70 years ago.”1 Finally, AIIB could have important
strategic implications for China’s relations with countries
in the region.
China’s diverse goals in forming AIIB are not freeof internal inconsistencies and external controversies.
Indeed, since China’s October 2013 announcementof its plan to establish the bank, AIIB has raised manyquestions, touched on many sensitive issues and led toserious policy debates in and outside China. There is an
intrinsic tension between China’s ambitious claims that
AIIB will provide funding for necessary infrastructure
projects, some of which may be financially risky, and thebank’s identity as a multilateral development bank rather
than a foreign aid agency.
With China the largest shareholder in AIIB and
Beijing clearly pursuing some of its national interests
through the bank, questions have also been raised about
the extent to which AIIB’s decision-making process and1

Matthew Goodman, “2014: A pivotal year for the global economic order,”CSIS PacNet #2, January 6, 2015, <http://csis.org/publication/pacnet-2-2014pivotal-year-global-economic-order>.

*The author is grateful to colleagues from the Chinese Academy of Social Sciences, China Institute of International Studies, China Institute of Contemporary International
Relations, Chinese Ministry of Commerce, World Bank, Chongyang Institute for Financial Studies, Renmin University of China, China Export-Import Bank, China Development
Bank and Eurasia Group for useful conversations as a background for this paper.

Asian Infrastructure Investment Bank: China as Responsible Stakeholder? 27

SASAKAWA PEACE FOUNDATION USA

operations will be truly multilateral. China’s stated goals ofmaintaining high standards at the bank, and also making
quick, practical decisions with a “lean” institution that
does not even have a resident board for oversight, present
other inherent challenges. Further uncertainties relate to
the details of AIIB’s fundraising model, loan guarantee
system and collaboration with existing multilateral
institutions. The AOA has provided some answers, butmany details have yet to be worked out.
The negotiation process that led to the AOA has
made China keenly aware of the incompatibility of some ofits goals, in turn leading Beijing to adjust its expectations
and position in certain areas. The unexpected embrace ofthe bank by developed European countries, for example,
created an opportunity to move AIIB toward prevailinginternational norms and standards. As a result, the AIIB
reflected in the AOA today is quite different from the AIIB
China envisioned before March 2015. In this sense, theevolution of AIIB may provide a model of how China’s
behavior can be shaped by the collective efforts of theinternational community and how China’s ambitions
can be accommodated without overturning the existing
international order.

2. BACKGROUND
Since Xi Jinping assumed the presidency in 2013, hisworld vision and global agenda have greatly shaped thepriorities of China’s foreign policy. In contrast to his
predecessor, Hu Jintao, Xi has adopted a more ambitious
and assertive foreign policy posture, as exemplified by theactive pursuit of Beijing’s territorial, political and economic
agendas. Within his grand vision of the “great rejuvenationof the Chinese nation,”2 a key underlying component
has been the establishment of a new, “proper” worldorder that reflects China’s elevated economic strengthand political status.3 China has identified a list of tasks to
expedite the inception of such a new world order. In thefield of economics, the goal has centered on reforming
the U.S.-led global economic order based on the Bretton
Woods system founded 70 years ago. To establish theso-called “new international economic order,” other tasks
include founding international financial institutions that
better reflect China’s economic status, internationalizing
the Chinese renminbi (RMB) and expanding China’s
leadership and influence through trade and investment.
This vision has particular relevance and implications
for Asia. In recent years, the escalation of tension between
China and some of its neighbors over maritime andterritorial disputes has heightened concern in Beijing about
the deterioration of China’s regional image and relations.
The Xi administration regards improved ties with Asianneighbors and the reinforcement of the concept of China’s“peaceful rise” as key challenges. Toward this end, Xi
identified Asia as the highest priority for China’s foreign
policy at the Periphery Diplomacy Working Conference in
October 2013. In the economic arena, China has sought
to leverage its ample economic resources to improve
political ties with Asian countries and strengthen its status.
China has also waged an economic charm offensive in theregion since 2013. For example, in 2013, Xi proposed
the 21st Century Maritime Silk Road to Southeast Asian
countries, promising investments and trade throughregional connectivity. 4 In 2014, Chinese Premier Li
Keqiang proposed a friendship treaty with Southeast Asian
countries and offered $20 billion in loans.5
To expedite the emergence of the new international
economic order, China under Xi has also pursued policies
to promote the creation of two multilateral financial
institutions, AIIB and the New Development Bank
(NDB). NDB was officially founded in July 2014 by
Brazil, Russia, India, China and South Africa, the so-called
BRICS countries. With initial capital of $50 billion equallydistributed among the five members, the Shanghai-based
NDB also created a Contingency Reserve Arrangement of
4

2

Robert Lawrence Khun, “Xi Jinping’s Chinese Dream,” The New York Times,
June 4, 2013, <http://www.nytimes.com/2013/06/05/opinion/global/xi-jinpingschinese-dream.html?pagewanted=all&_r=0>.
3
Yun Sun, “BRICS and China’s Aspiration for the New ‘International Order,’”
Brookings Institution, March 25, 2013, <http://www.brookings.edu/blogs/upfront/posts/2013/03/25-xi-jinping-china-brics-sun>.

28 Asian Infrastructure Investment Bank: China as Responsible Stakeholder?

Wu Jiao and Zhang Yunbi, “Xi in Call for Building of New ‘Maritime Silk
Road,’” China Daily, October 4, 2013, <http://usa.chinadaily.com.cn/
china/2013-10/04/content_17008940.htm>.
5
Simon Webb and Paul Mooney, “China Offers ASEAN Friendship,
Loans as South China Sea Tension Bubbles,” Reuters, November 13, 2014,<http://www.reuters.com/article/2014/11/13/us-myanmar-asean-chinaidUSKCN0IX0W920141113>.

SASAKAWA PEACE FOUNDATION USA$100 billion, funded primarily by China (41%), followed
by Brazil, India and Russia (18% each) and South Africa(5%).6 In October 2014, the MOU on establishing AIIB
was signed in Beijing by 21 Asian countries.

3. CHINA’S MOTIVATIONS INESTABLISHING AIIB
Within the context of China’s assertive foreign policy
posture and its prioritization of Asian diplomacy, multiple
factors motivated Beijing in its decision to establish AIIB.
These include a seemingly altruistic attempt to address theregion’s capital shortage for infrastructure projects as well
as China’s economic, political and strategic self-interest inadvancing the country’s policy agenda.

(1) Financing Regional Infrastructure Development
China has pointed to the funding shortage for
infrastructure development in Asia as its primary
motivation for founding AIIB. China has cited data fromthe World Bank and the Asian Development Bank (ADB)
to support the need for infrastructure in the region. The
World Bank estimates a $1 trillion infrastructure shortfall
in low- and middle-income countries, and suggests thatthe demand for infrastructure will continue to grow as
countries develop.7 According to a more Asia-specificreport by ADB in 2009, between 2010 and 2020, Asia willneed to invest $8 trillion in national infrastructure and an
additional $290 billion in regional infrastructure projects
in transport and energy.8 Indeed, AIIB will provide
6

Raj M. Desai and James Raymond Vreeland, “What the New Bank of
BRICS Is All About,” The Washington Post, July 17, 2014, <http://www.
washingtonpost.com/blogs/monkey-cage/wp/2014/07/17/what-the-new-bankof-brics-is-all-about/>.
7“World Bank Infrastructure Overview,” The World Bank, <http://
web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTINFRA/
0,,content MDK:23136173~menuPK:8497173~pagePK:64168445~
piPK:64168309~theSitePK:8430730,00.html>.
8“Infrastructure for a Seamless Asia,” Asian Development Bank Report, August
31, 2009, p. 4, <http://adb.org/sites/default/files/pub/2009/2009.08.31.book.
infrastructure.seamless.asia.pdf>. “Public Private Partnerships Key to Meeting
Asia’s $8 Trillion Infrastructure Needs - Study,” Asian Development Bank News
Release, May 30, 2012, < http://www.adb.org/news/public-private-partnershipskey-meeting-asias-8-trillion-infrastructure-needs-study>. “China Exclusive:
Asian Infrastructure Investment Bank Will Guide Capital,” Xinhua News
Agency, July 3, 2014, <http://www.china.org.cn/china/Off_the_Wire/201407/03/content_32850821.htm>. “AIIB Propels Sustainable Developmentin Asia,” Xinhua News Agency, November 8, 2014, <http://en.people.cn/
business/n/2014/1108/c90778-8806310.html>.

increased funding for infrastructure in such areas asenergy, telecommunications and transportation, which areof particular importance for Asian countries undergoing
rapid industrialization and urbanization.
In China’s own experience, despite someadverse consequences, increasing public spending on
infrastructure has been a popular strategy to promote
growth. For example, after the 2008 international
financial crisis and the subsequent negative impact
on Chinese export industries, Beijing introduced a 4
trillion RMB infrastructure-heavy stimulus package
to encourage growth.9 Leaders in Beijing generally
view that initiative as a success, as China’s economy
continued to grow in the face of a prolonged, major global
recession (though there have also been some negative
consequences). China views infrastructure investment
in Asia – especially projects focused on intra-regionaltransportation and communication – as having a similarpotential for promoting regional growth and economic
development. Given China’s own favorable experience
with infrastructure investment, most Chinese officials
and analysts genuinely seem to believe that AIIB will
improve infrastructure in Asia and therefore represent a
positive contribution by China to the regional demand fordevelopment financing.

(2) Promoting China’s “One Belt,
One Road” Strategy“One Belt, One Road” is one of the most important
strategic initiatives that Xi has adopted since 2013.
Focusing on trade promotion, infrastructure development
and regional connectivity, China designed the new Silk
Road Economic Belt to link the country with Central Asia,
the Middle East and Europe, and the Century Maritime
Silk Road to connect China with Southeast Asia and,later, Europe and Africa via the Indian Ocean. One Belt,
One Road is regarded in China as an upgraded version ofChina’s “opening-up” policy, with key projects focusedon national and intra-regional transportation, power and

9“China’s 4 Trillion Yuan Stimulus to Boost Economy, Domestic Demand,”Xinhua News Agency, November 9, 2008, <http://news.xinhuanet.com/
english/2008-11/09/content_10331324.htm>.

Asian Infrastructure Investment Bank: China as Responsible Stakeholder? 29

SASAKAWA PEACE FOUNDATION USA

New Silk Roads: China is assembling new trade routes, binding other regions closer to it

Source: Jeremy Page, “China Sees Itself as the Center of the New Asian Order,” The Wall Street Journal, November 9, 2014, <http://www.wsj.com/articles/chinas-new-trade-routescenter-it-on-geopolitical-map-1415559290>.

telecommunications infrastructure.
Since most of the countries along the planned routes
have developing economies, China sees great potential ineconomic cooperation through a variety of tools, including
traditional free trade agreements, sub-regional cooperation,
economic corridors, special economic zones, connectivity
projects, transnational transportation systems and financial
cooperation. In particular, Beijing has identified One Belt,
One Road as the most important mid- to long-term strategy
to foster China’s economic restructuring and boost thecountry’s slowing economic growth.10
Xi clearly believes that AIIB will help in theimplementation of the One Belt, One Road strategy. Soon
after the MOU on founding AIIB was signed, he said,“China’s inception and joint establishment of the AIIB with

10

Li Qiaoyi, “Making It Work: High Hopes for ‘One Belt, One Road’ Initiative,”
Global Times, March 10, 2015, <http://www.globaltimes.cn/content/911258.
shtml>.

30 Asian Infrastructure Investment Bank: China as Responsible Stakeholder?

some countries is aimed at providing financial support for
infrastructure development in countries along the ‘One
Belt, One Road’ and promoting economic cooperation.”11
The spokesperson for the National People’s Congress(NPC) reinforced Xi’s views during the “Two Sessions”
of the NPC in March 2015, saying, “AIIB and the Silk
Road Fund are both created for the better implementationof ‘One Belt, One Road.’”12 Some in China have evenproposed that AIIB focus on the construction of a BeijingBaghdad railway, key to the completion of the “Silk Road
Economic Belt.”13
11“Xi Jinping: Expedite the Development of the Silk Road Economic Belt andthe 21st Century Maritime Silk Road,” [习近平：加快推进丝绸之路经济
带和21世纪海上丝绸之路建设], Xinhua News Agency, November 6, 2014,<http://news.xinhuanet.com/politics/2014-11/06/c_1113146840.htm>.
12“Fu Ying: AIIB and the Silk Road Fund Support ‘One Belt, One Road,”’[傅莹：亚投行、丝路基金支持‘一代一路’], China Business News, March 4,2015,，<http://www.yicai.com/news/2015/03/4581546.html>.
13“AIIB’s First Goal is to Build the Beijing-Baghdad Railway, [消息称亚投行首个目标是建北京到巴格达铁路], International Finance News, November
24, 2014, <http://finance.ifeng.com/a/20141124/13300870_0.shtml>.

SASAKAWA PEACE FOUNDATION USA

Indeed, most Chinese analysts and officials draw
a close correlation between AIIB and the One Belt,
One Road strategy, viewing AIIB as the government’s
mechanism for providing financial and technical support
in implementing the strategy.14 According to Nankai
University scholar Liu Chenyang, “Although the AIIB
is not completely equal to the ‘One Belt, One Road’
plan unilaterally promoted by China, they both focus onconnectivity and infrastructure and AIIB provides a model
for fundraising for such infrastructure development in
the region.”15 Local governments and Chinese companies
have demonstrated great enthusiasm for both One Belt,
One Road and AIIB as positive indicators of massive,
upcoming central government spending. Anticipation ofthis spending has created immense competition among
local provincial governments and Chinese companies toparticipate in the projects necessary for the completion of
One Belt, One Road.16(3) Exporting China’s Excess Capacity and Capital
Analysis from China indicates that AIIB closely aligns
with China’s economic priorities of addressing the
problem of excess capacity and exploiting the country’s
burgeoning foreign exchange reserves. The series ofmassive government stimulus packages since 2008
produced growth but also created excess capacity –initially in steel and construction, expanding more recently
to photovoltaics, wind power and other industries. Given
limits on domestic demand and sluggish recovery ofexports to developed countries, the Xi administration has
made it a top priority to stimulate foreign demand as ameans of absorbing excess capacity.17 Meanwhile, China’s
enormous and growing foreign reserves – the world’s
largest at the end of 2014 at $3.84 trillion – are anotherconcern for Beijing.18 After a long-standing debate, a
14Interviews with Chinese analysts, Beijing, January 2015.
“AIIB Draws Near, ‘One Belt, One Road’ Economies Join the Bank,” ［亚投行渐行渐近，“一带一路”经济体纷纷加入], Shanghai Securities
News, October 24, 2014, <http://www.mof.gov.cn/zhengwuxinxi/caijingshidian/shzqb/201410/t20141024_1154174.html>.
16
Interview with a Chinese analyst, Beijing, January 2015.
17
Interview with a Chinese official, Beijing, January 2015.
18“2014 Financial Statistics Report,” [2014 年金融统计数据报告], The
People’s Bank of China, January 15, 2015, <http://www.pbc.gov.cn/publish/
goutongjiaoliu/524/2015/201501150 91411484569100/2015011509141148
15

general consensus has emerged in China that the country
should diversify its investment portfolio beyond U.S.
securities and other dollar assets.
The combination of excess capacity and capital led tothe creation of what has been termed a “Chinese MarshallPlan.”19 This plan envisions large-scale capital investmentin the infrastructure of emerging economies along the
One Belt, One Road, thereby turning foreign reserves
into practical assets, while a growing Asian infrastructure
market absorbs export excess capacity. The plan would
have the additional benefit of generating jobs for Chineselaborers.20
The most cited wisdom in China on AIIB’s economic
utility reflects the strategy, in that the bank can becomea channel for China to invest in Asian infrastructure
projects, while creating business opportunities for
Chinese manufacturers and contractors. Chinese analysts
also hope that such investments will diversify China’s
foreign investment portfolio and expedite the export ofChinese capital.21 Such a China-centric mission, however,inherently conflicts with AIIB’s stated goal of becoming a
multilateral financial institution.

(4)“Democratizing” the International
Economic OrderAs discussed above, China aspires to reform the existing
international financial system in order to accommodate
its own expanding economic power and influence. Many
Chinese believe that the Bretton Woods institutions – theWorld Bank, International Monetary Fund (IMF) and
ADB – which are dominated by the West under U.S.
leadership, unfairly disadvantage China in the international
economic system.

4569100.html>.
19
The popularity of the term declined after it drew criticism and an analogy to
the “ideologically-driven” U.S. Marshall Plan that aimed to contain the Soviet
Union. Zheng Xie, “‘One Belt, One Road’ Is Not the Chinese Version of the
Marshall Plan,” Global Times, November 16, 2014, <http://opinion.huanqiu.
com/ opinion_world/2014-11/5204124.html>.
20
Jiang Jinze, “The Chinese Version of Marshall Plan Marches On: Silk Road
Fund to be Founded,” [“中国版马歇尔计划”持续推进：丝路基金成立在即],
WallStreetCN, November 6, 2014, <http://wallstreetcn.com/node/210340.
21“SOEs Plan for ‘One Belt, One Road,’” [央企谋篇布局“一带一路”], China Securities, December 26, 2014, <http://finance.eastmoney.com/
news/1350,20141226461336265.html>.

Asian Infrastructure Investment Bank: China as Responsible Stakeholder? 31

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While China has supported (and maintains that it
will continue to support) the current system, Chinese
leaders have been particularly frustrated by the existing
multilateral financial institutions’ governance structures,
which have not evolved to reflect the new distributionof power in the global economy. With gross domestic
product (GDP) of $10 trillion in 2014, China’s economy
is projected to surpass that of the United States within adecade, becoming the world’s largest.22 However, China’s
voice in multilateral financial institutions has not kept
pace with the country’s economic stature. The UnitedStates retains 16.75% of the votes in the IMF, while Chinaholds only 3.81%.23 As a Financial Times article explains,the IMF’s “quota system, which determines what eachcountry pays in and how many votes they are given, fails toreflect the reality of a changing world. The BRICS nations,which account for more than a fifth of global output, havea quota of just 10.3%. European countries, by contrast, areallocated 27.5% for 18% of output. To add insult to injury,
the IMF presidency is reserved for a European, while thatof the World Bank routinely goes to an American.”24
While the need for reform is generally recognized,
proposed changes face an uncertain future.25 IMF member
countries struck an agreement in 2010 to boost the
combined voting power of emerging markets, including
China, Brazil and Turkey, from 42.1% to 44.7%.26
Despite the modesty of the proposed adjustment, the U.S.
Congress has repeatedly failed to sanction the agreement
due to concerns that the deal would weaken U.S. influencein the IMF – despite the fact that the United States
would retain veto power at the institution. As Brookings
22

David Dollar, “The Creation of the Asian Infrastructure Investment Bank is
the Right Move for the Global Economy,” The New York Times, November 22,
2014, <http://www.nytimes.com/roomfordebate/2014/10/20/a-chinese-rival-tothe-world-bank/the-creation-of-the-asian-infrastructure-investment-bank-is-theright-move-for-the-global-economy>.
23“IMF Members’ Quotas and Voting Power, and IMF Board of Governors,”
IMF, March 9, 2015, <https://www.imf.org/external/np/sec/memdir/members.
aspx>.
24
David Pilling, “The BRICS Bank is A Glimpse of the Future,” The Financial
Times, July 14, 2014, <http://www.ft.com/intl/cms/s/0/f7b876a0-170e-11e4b0d7-00144feabdc0.html#axzz3Qgt5KYKc>.
25“Developing Countries Seek New Path for Fund Governance Reform,”
Bretton Woods Project, May 8, 2014, <http://www.brettonwoodsproject.
org/2014/05/developing-countries-seek-new-path-fund-reform/>.
26
Paul Davidson, “G20 Nations Side Against U.S. on IMP Changes,”
USA Today, April 11, 2014, <http://www.usatoday.com/story/money/
business/2014/04/11/g20--imf-world-bank-meeting/7601915/>.

32 Asian Infrastructure Investment Bank: China as Responsible Stakeholder?

Scholar David Dollar aptly explains, China is “frustrated
with the lack of governance reform, slow pace of project
implementation and reluctance to expand lending on
the part of the existing development banks [and thus is]starting its own.”27
Since announcing its plan to establish AIIB, Beijing
has had to address how the new bank will handle
relationships with existing multilateral developmentbanks (MDBs). Most Chinese officials and analysts
have downplayed competition, instead emphasizing
the potential for mutually complementary relationships
among AIIB, the World Bank and ADB. Highlighting
complementarity, however, fails to address the reality ofthe market for infrastructure finance. While the demandis large enough to accommodate all three banks, thecompetition for good quality projects is steep. Unless
AIIB intends to fund projects that the World Bank and
ADB reject (for legitimate commercial or non-commercial
considerations), it must inevitably compete with the WorldBank and ADB over “fundable” projects in Asia.
Many Chinese and foreign analysts do not see suchcompetition as a bad thing.28 AIIB could induce existing
institutions, such as the World Bank and ADB, to improve
operations, enhance efficiency and reform current
management structures. Alternatively, analysts in China
have also discussed the possibility of AIIB collaboratingwith the World Bank and ADB on certain projects. For
example, Professor Xi Shiqing from Peking University hasargued that AIIB and ADB could complement each otherin terms of funding, functional expertise and infrastructure
project specialties.29 However, since AIIB has yet to clarify
fully its operating and fundraising models, the likelihood ofcollaboration remains uncertain.

27

David Dollar, “The Creation of the Asian Infrastructure Investment Bank is
the Right Move for the Global Economy,” The New York Times, November 22,
2014, <http://www.nytimes.com/roomfordebate/2014/10/20/a-chinese-rival-tothe-world-bank/the-creation-of-the-asian-infrastructure-investment-bank-is-theright-move-for-the-global-economy>.
28
Interviews with Chinese and American scholars, Beijing and Washington DC,
January 2015.
29
Xie Shiqing, “AIIB and ADB Could Achieve Win-Win,” China Business
News, November 12, 2014, <http://www.yicai.com/news/2014/11/4039273.
html>.

SASAKAWA PEACE FOUNDATION USA(5) Internationalization of the Chinese Renminbi
China sees the status of the U.S. dollar as the main
reserve currency in international trade and finance as thebasis for American “financial hegemony,” which hinders
the expansion of Chinese economic influence.30 The
internationalization of the RMB is part of China’s broader
strategic goal of democratizing the global order, which
requires, in part, a decrease in the dollar’s influence.
Since 2009, China has actively sought tointernationalize the RMB, largely by establishing theso-called “dim sum bond market” and the Cross-Border
Trade RMB Settlement Pilot Project, which establishedpools of offshore RMB liquidity. China hopes AIIB will
strengthen these efforts through increased and diversified
channels. Most important, infrastructure development
financing by AIIB could popularize the RMB as a tradedcurrency, thereby boosting its position.
Suggestions for improving the structure of AIIB
have touched upon the RMB’s status, as well. As Simon
Tay writes in The Asia Weekly, “Another key to making
a better AIIB is to float public bonds and other market
instruments for infrastructure funding… For China, suchmoves would also further the internationalization of theYuan.”31 Ultimately, the internationalization of the RMB
depends on its attractiveness “as a unit of trade, a store ofvalue and for portfolio investments.”32 As countries with
development and infrastructure needs in Asia increase
their trade and investment relations with China, many of
their central banks will consider investing part of theirforeign currency reserves in RMB. Many in China hopethat AIIB strengthens and expedites this trend.

(6) Strategic Aspirations
While China may have created AIIB primarily basedon economic considerations, strategic considerations
30“World Bank Fails to Address China’s Demand, the New AIIB Defeats theWestern Financial Hegemony,” [世行难顾中国诉求 亚投行新起炉灶破西
方金融霸权], Takungpao, September 2, 2014, <http://finance.takungpao.com/
hgjj/q/2014/0902/2708347.html>.
31
Simon Tay, “New Bank Could Provide Better Way Forward,” China Daily
Asia, October 31, 2014, <http://epaper.chinadailyasia.com/asia-weekly/
article-3519.html>.
32
James Kynge, “Emerging Markets Eye Renminbi Trading Alternative to
Dollar,” The Financial Times, September 30, 2014, <http://www.ft.com/intl/
cms/s/0/df11fbbe-2ea4-11e4-afe4-00144feabdc0.html#axzz3TvcBbEyb>.

also played a significant role. Beyond China’s goals of
improving its regional and global status and reforming
the international system, Chinese foreign policy officials
hope that China’s financial contribution toward regional
infrastructure and economic development through AIIB
will immediately assist and improve China’s overall
relations with countries on its periphery.33
China believes that the regional transportation
network and trade promotion facilitated by AIIB willtighten recipient countries’ economic ties to China,
which China believes will naturally translate into
strategic influence throughout the region. Since Xi’sinauguration, heightened tensions over territorial andmaritime disputes have damaged China’s reputation andrelationships. However, many in China believe that AIIB’s
economic impact will help reverse this trend, improvethe country’s image and provide incentives for otherwise
unaccommodating nations to cooperate with Beijing.
Some in China argue that AIIB will have a dual
strategic utility. It could be used, as one influential
Chinese media outlet put it, to “strengthen ties anchoredon interests among Asian countries and ease the current
geopolitical tension in Asia, especially in the East Asian
region. For China, this is conducive to the periphery
diplomacy guideline to ‘be benign partners of ourneighbors’ and promote the joint development in the Eastand South China Seas.”34 AIIB could also be employed
to discourage countries from adopting China-unfriendly
policies. In addition, some Chinese foreign policy experts
have privately commented that, given the Philippines’
approach toward China over disputed territory in theSouth China Sea, it would be difficult for the Philippines
to receive favorable consideration by the two financial
institutions that China dominates (AIIB and the Silk
Road Fund).35
Some Chinese analysts trace the original motivation
for One Belt, One Road and AIIB (as One Belt, One
Road’s supporting institution) to Peking University

33

Interviews, Beijing, January 2015.
“Seven Reasons to Found AIIB,” [设立亚投行的七个理由], China
Securities, October 23, 2014, <http://news.cnstock.com/news/sns_
zxk/201410/3217216.htm>.
35
Interview with a Chinese official, Beijing, January 2015.
34

Asian Infrastructure Investment Bank: China as Responsible Stakeholder? 33

SASAKAWA PEACE FOUNDATION USA

Professor Wang Jisi’s “Westward” strategy proposal in late
2012.36 Wang recommended that China pivot to avoid
confrontation with the United States in the Asia Pacificand seek an alternative sphere of influence in the vast
area west of China. The Westward strategy included an
important national security component aimed at fighting
terrorism, religious extremism and separatism in thevolatile Xinjiang Uyghur Autonomous Region.37 In thissense, AIIB may also aim to improve China’s national
security and external environment through stronger
and better ties with Central Asian and Middle Easterncountries. The speculation that AIIB’s first project will be
the Beijing-Baghdad railway or Pakistan-China economic
corridor seems to confirm this strategic orientation.
It is worth pointing out that not all Chinese analysts
agree with this geopolitical, strategic explanation forthe creation of AIIB. Particularly in the trade, financial
and business communities, most experts emphasizethat the primary goal of AIIB is anchored in economic
and commercial considerations. These analysts do notnecessarily reject the strategic utility of the bank, but stressthat AIIB should function, first of all, as a commercialbank and be treated as such. In this sense, there is ademonstrated reluctance to allow political consideration tointerfere with AIIB’s decision-making.

4. AIIB BASICS

31, 2015. PFMs that sign the AOA will have until
December 31, 2016, to provide their ratification,
acceptance or approval of the AOA.

(3) Headquarters
Beijing, China.39(4) Preparatory Group and Its Leadership
The AIIB preparatory group – the Working Group for
Establishment of Asian Infrastructure Investment Bank
– was established in early 2014. Chinese participants
are comprised mainly of officials and experts from the
Ministry of Finance and the National Development andReform Commission (NDRC), with the Export-Import
Bank of China as its technical advisor.40 The group’s
director is Jin Liqun, who formerly served as chairmanof the board of supervisors at the China Investment
Corporation, China’s sovereign wealth fund. The deputy
director, Chen Huan, is the former director-general of
the Ministry of Finance’s China Clean Development
Fund Management Center. Jin was elected on October24, 2014, as secretary-general of the Multilateral Interim
Secretariat for Establishing the AIIB. The Representative
Meeting for the Negotiation on the Establishment of the
Asian Infrastructure Investment Bank is co-chaired by Shi
Yaobing, China’s deputy minister of finance, and Dinesh
Sharma, India’s assistant minister of finance.41(1) Date of Launch
October 24, 2014: Ceremonial launch with 21 countries
signing on to a memorandum of understanding (MOU).

(2) Formal Establishment
June 29, 2015: Signing Ceremony of the Articles ofAgreement (AOA) of AIIB.38
The AOA will remain open for signature by
Prospective Founding Members (PFM) until December
36Interview with a Chinese analyst, Beijing, January 2015.
Wang Jinsi, “Westward: China’s Own Geostrategic Rebalancing,” [西进：中国的地缘战略再平衡], The Global Times, October 17, 2012, <http://
opinion.huanqiu.com/opinion_world/2012-10/3193760.html>.
38“Fifty Countries Sign the Articles of Agreement for the Asian Infrastructure
Investment Bank,” AIIB, June 29, 2015, <http://www.aiibank.org/html/2015/
NEWS_0629/11.html>.
37

34 Asian Infrastructure Investment Bank: China as Responsible Stakeholder?

(5) Original Signatory Countries (21)Bangladesh, Brunei, Cambodia, China, India, Kazakhstan,
Kuwait, Laos, Malaysia, Mongolia, Myanmar, Nepal,
Oman, Pakistan, Philippines, Qatar, Singapore, Sri Lanka,
Thailand, Uzbekistan and Vietnam.42
39“AIIB Articles of Agreement,” AIIB, June 29, 2015, <http://www.aiibank.
org/uploadfile/2015/0629/20150629094900288.pdf>. Earlier media reports
indicated India and Indonesia’s interest in competing for AIIB’s headquarters
location.
40
Interviews with World Bank officials, Beijing, January 2015.
41“Shi Yaobin Attended the Second Chief Negotiator Meeting on the
Establishment of the AIIB,” ”[史耀斌出席筹建亚投行第二次谈判
代表会议], Department of International Financial Cooperation, Chinese
Ministry of Finance, January 20, 2015, <http://www.mof.gov.cn/zhengwuxinxi/
tupianxinwen1/201501/t20150120_1182258.html>.
42“21 Asian Countries Sign MOU on Establishing Asian Infrastructure
Investment Bank,” Xinhua News Agency, October 24, 2014, <http://news.

SASAKAWA PEACE FOUNDATION USA(6) Prospective Founding Members (57)
Australia, Austria, Azerbaijan, Bangladesh, Brazil, Brunei,
Cambodia, China, Denmark, Egypt, Finland, France,
Georgia, Germany, Iceland, India, Indonesia, Iran, Israel,
Italy, Jordan, Kazakhstan, Kuwait, Kyrgyz Republic,
Laos, Luxembourg, Malaysia, Maldives, Malta, Mongolia,
Myanmar, Nepal, Netherlands, New Zealand, Norway,
Oman, Pakistan, Philippines, Poland, Portugal, Qatar,
Republic of Korea, Russia, Saudi Arabia, Singapore, South
Africa, Spain, Sri Lanka, Sweden, Switzerland, Tajikistan,Thailand, Turkey, UAE, United Kingdom, Uzbekistan
and Vietnam.

(7) Signatory Countries of AOA on June 29, 2015 (50)
Fifty of the 57 PFMs signed the AOA on June 29, 2015.
The seven countries that chose to defer signing the
document are the Philippines, Denmark, Kuwait, Malaysia,
Poland, South Africa and Thailand.43(8) Capital 44
AIIB’s authorized capital stock will be $100 billion,
divided into one million shares having a par value of$100,000 each. The original authorized capital stock
will be divided into 20% paid-in shares and 80% callable
shares. The authorized capital stock may be increased by
the board of governors.
As a regional bank, AIIB’s Asian members will holdthe majority of capital stock – a minimum 75%, except
as otherwise agreed by the board of governors. This
shareholding arrangement reflects the commitment andownership of regional members. Schedule A of the AOA
shows unallocated shares totaling about $1.6 billion forregional members and $234 million for non-regional
members in anticipation of additional members joining
each category. These numbers may change, depending on
actual subscriptions by PFMs. Unallocated shares would
be available for subscription by new or existing members
xinhuanet.com/english/business/2014-10/24/c_133740149.htm>.
43
Richard Javad Heydarian, “Asian Infrastructure Investment Bank: China’s
Trojan Horse?” The Huffington Post, July 2, 2015, <http://www.huffingtonpost.
com/richard-javad-heydarian/asian-infrastructure-inve_b_7717540.html>.
44“Key Provisions,” AIIB official website, <http://www.aiibank.org/html/
pagefaq/Key/>.

as determined by the board of governors.
The basic parameter for allocating capital stock toeach member is the relative share of its global economy(based on GDP) within the regional and non-regionalgroupings, with the understanding that GDP share isindicative only for non-regional members. (According toChinese vice finance minister Shi Yaobin, the allocationof the capital stock was calculated following the formulaof 60% nominal GDP and 40% GDP purchasing power
parity of member countries.)45
In addition to the capital provided by members, AIIB
will raise funds primarily through the issuance of bonds
in financial markets as well as through inter-bank market
transactions and other financial instruments. AIIB may
also raise funds, through borrowing or by other means,in member countries or elsewhere, in accordance with
relevant legal provisions. AIIB will seek to obtain thehighest credit rating possible to facilitate borrowing in
capital markets.

(9) Governance Structure
AIIB will have a board of governors, board of directors,president, one or more vice presidents and other officers
and staff as needed.
Each member of AIIB will appoint a governor torepresent it on the board of governors. All AIIB powers are
vested in the board of governors. The board of governors
can delegate any of its powers to the board of directors,
except certain reserved powers. The board of governors
meets annually.
AIIB will have 12 directors on its board of
directors: nine elected by regional members and threeelected by non-regional members. Each director will
have an alternate director, and directors elected by morethan a specified number of members may appoint anadditional alternate director. The board of directors willfunction on a non-resident basis, except as otherwise
decided by the board of governors. The board of
directors is expected to meet regularly in physical45“Vice Minister Shi Yaobin Answers Reporters’ Questions about AIIB Articles
of Agreement,” [史耀斌副部长就《亚投行协定》相关问题答记者问], Chinese Ministry of Finance, June 29, 2015, <http://www.mof.gov.cn/
zhengwuxinxi/caizhengxinwen/201506/t20150629_1262934.html>.

Asian Infrastructure Investment Bank: China as Responsible Stakeholder? 35

SASAKAWA PEACE FOUNDATION USA

meetings and to have electronic meetings as needed.
The board of directors will be responsible for the
direction of AIIB’s general operations and, for thispurpose, will exercise all the powers delegated to them by
the board of governors.
It is worth noting that AIIB’s governance structureis largely in line with what the Chinese government had
stated before the negotiation of the AOA. For example,
as early as October 2014, the Chinese finance minister
had stipulated that the governance structure would becomposed of three tiers: the board of governors, the boardof directors and the president and bank management.46
He also indicated that the board of directors would be
non-resident, a rather controversial arrangement that could
potentially weaken the actual power and authority of thebank’s operation.

(10) Shareholding and Voting Power
According to the AOA, members’ voting power isallocated based on the sum of their basic votes, share votes
and, where applicable, founding member votes. Basic
votes for all members constitute 12% of the total numberof votes (basic votes, share votes and founding member
votes). An equal number of basic votes is allocated to eachmember. For share votes, each member has one vote foreach share of capital stock held. Each founding member isalso allocated six hundred (600) founding member votes.
China will hold 30.34% of the share and 26.06% of
the total voting power, followed by India (8.52% stakeand 7.5% voting power), Russia (6.66% stake and 5.93%
voting power), Germany (4.57% stake and 4.15% voting
power) and South Korea (3.81% stake and 3.5% voting
power).47

5. CHINA’S EVOLVING POSITION
After the initial, overwhelming focus on China’s strategic
intentions in setting up AIIB and its implications for the
existing global balance of power, observers’ attention
rapidly shifted toward questions about the bank itself. In
particular, observers have been keen to know the extent
to which the bank will be used to carry out China’s own
political and economic aims, and how much China will
honor its commitment to making AIIB a truly multilateraldevelopment institution, rather than its own policy
instrument. The essential questions around AIIB are
all embedded in its presumed Chinese identity. The
negotiation process and the AOA revealed China’s
evolving positions and helped answer some of thesequestions, but significant issues remain to be addressed.
For example, China’s position on AIIB’s membership,especially non-regional members, has undergone asignificant shift. Originally, China had not planned for
non-Asian countries to join AIIB.48 Prior to the waveof European countries’ applications, there were clear
indications that China was not optimistic that non-regional
members would join early. As late as March 6, 2015, theChinese finance minister stated at the National People’s
Congress that “the relative consensus among the 27
current Prospective Founding Members (PFMs) is that theProspective Founding Membership is open to countries
from the region first and applications from countries
outside the region are not considered for now.”49 The
statement was made six days before the United Kingdom
submitted its application to become a PFM, raisingquestions about the wisdom of the minister’s statement.
The expectation among Chinese scholars and officials
that, initially, AIIB would only be open to countries

48“Chinese Finance Minister: AIIB Capital is $100 Billion,” [中国财长楼继伟：亚投行法定资本为1000亿美元], Xinhua News Agency, October 24,
2014, <http://news.xinhuanet.com/fortune/2014-10/24/c_1112965833.htm>.
47
Cary Huang and Andrea Chen, “China to Have 30 Percent Stake, Veto Power
under AIIB Deal,” South China Morning Post, June 30, 2015, <http://www.
scmp.com/news/china/diplomacy-defence/article/1829342/aiib-deal-sealschinas-big-stake-new-lender>.
46

36 Asian Infrastructure Investment Bank: China as Responsible Stakeholder?

As the Chinese Finance Minister said, “China advocates an open regionalism
and welcomes willing Asian countries to participate in the coordination andestablishment of the Bank and to open the membership to non-regionalcountries under the principle of ‘regional countries prior to non-regionalcountries.’” See “Lou Jiwei Answers Reporters’ Questions on the Establishmentof AIIB,” [楼继伟就筹建亚洲基础设施投资银行答记者问], Chinese
Ministry of Finance, March 7, 2014, <http://www.mof.gov.cn/zhengwuxinxi/
caizhengxinwen/201403/t20140307_1053025.html>.
49“Lou Jiwei: Confirmation for the Eligibility to Become AIIB Prospective
Founding Members Closes by the End of March,” [楼继伟：亚投行创始会员国资格确认3月底截止], Xinhua News Agency, March 6, 2015, <http://
news.xinhuanet.com/politics/2015lh/2015-03/06/c_1114552782.htm>.

SASAKAWA PEACE FOUNDATION USA

within the region was based on the assumption that mostdeveloped countries would not welcome the bank, since
they would likely perceive it as a challenge to the existing
international financial institutions. In addition, in light ofWashington’s clearly stated “opposition” to the bank andto its allies joining the bank, the calculation was that China
would avoid international embarrassment by targeting
regional countries, rather than by soliciting Western
nations.50
The enthusiasm demonstrated by advanced
economies, including 14 countries from the Group of
20, to join AIIB was a welcome surprise for China.51
Beijing rapidly adapted its position to welcome European
countries as well as African and Latin American countries
as PFMs. The focus on regionalism was dropped andreplaced by a distribution of capital shares between
regional (75%) and non-regional (25%) members. The
surge in the membership base, with a total of 57 PFMs,
greatly strengthened AIIB’s legitimacy and enhanced
China’s leadership image regionally and globally. Further,
China’s success in winning over developed country
members, especially U.S. allies such as the United
Kingdom and South Korea, has been perceived as a major
diplomatic victory for China over the United States.
Another significant change in China’s approach tothe bank is that it clarified and confirmed AIIB’s natureand identity as an MDB. This represents a change fromearly 2015, when the bank was discussed as either an aid
agency or a commercial bank. The “aid” argument madeby many foreign policy analysts was that, since many,
if not most, AIIB members would be less-developed
countries in Asia, and they would be unlikely to contribute
substantially toward the bank’s capital, China might berequired to make a contribution of as much as 50% of thebank’s total. With such an overwhelming contribution by
China, AIIB would essentially amount to another Chinesechannel for financing Asian infrastructure development,
hence blurring the difference from Chinese aid. Among

financiers, commerce and finance officials holding
opposing views – perhaps to defuse the “aid agency”
argument – contended that AIIB would be a marketoriented, profit-seeking commercial bank that specializes
in financing infrastructure projects, and that “China did
not found the bank to lose money, but to make a profit.”52
The final configuration of AIIB avoids both extremes
and reflects a middle-way approach that had not been
particularly popular in China, early on. As stipulated by
the AOA, AIIB will be a new MDB designed to provide
financial support for infrastructure development andregional connectivity in Asia. In the view of many Chinese
analysts, this differentiates AIIB from both commercial
banks and policy banks. Some, therefore, perceive AIIB asa “quasi-commercial bank,” meaning its investments must
generate returns.53
Simple as it sounds, the need to generate returns
raises a key question regarding how the bank will balance
funding infrastructure projects with practical concerns
over the fundability and profitability of those projects.
Infrastructure development is known for long funding
cycles, low interest rates and potential for waste andcorruption. If AIIB were to grant loans that other banks
reject for commercial reasons, it would assume major risks.
Especially in less-developed Asian countries with volatile
domestic economies and unstable governments, how therecipient will repay the loans is a major question for any
bank, including AIIB. China has traditionally adopted
a “resources for infrastructure,” bilateral lending modelthrough which the recipient country repays Chinese loans
with natural resources or other contracts. Given how
controversial and widely criticized that model has been,
particularly among Western members of the bank, AIIB
could not employ that method of repayment.
Despite the rosy original blueprint it developed,
China has been forced to face the inherent conflict

52

50

Ibid.
Jane Perlez, “Stampede to Join China’s Development Bank Stuns
Even Its Founder,” New York Times, April 2, 2015, <http://www.nytimes.
com/2015/04/03/world/asia/china-asian-infrastructure-investment-bank.
html?_r=0>.
51

Interviews, Beijing, January 2015. Zhou Yongsheng, “Japan is Short-Sighted
to Reject AIIB as Instructed by the U.S.,” [日本拒绝亚投行很短视 美国
曾对其打招呼], Global Times, March 18, 2015, <http://mil.huanqiu.com/
observation/2015-03/5939949.html>.
53“AIIB’s Fundraising Framework Emerges with Special Funds Covering
Special Business,” [亚投行投融资框架图浮出水面 特别业务由特别基金融资], Economic Information Daily, June 30, 2015, <http://news.xinhuanet.
com/fortune/2015-06/30/c_127964386.htm>.

Asian Infrastructure Investment Bank: China as Responsible Stakeholder? 37

SASAKAWA PEACE FOUNDATION USA

between funding potentially loss-making infrastructure
projects and seeking profits. Multiple conferences
dedicated to the issue were held in Beijing in the firsthalf of 2015. Most analysts agree on the risks in the
Asian infrastructure market and the need for AIIB
to avoid them.54 In search of a solution, a consensus
emerged among experts that the bank would need to beparticularly cautious and commercially minded in its
lending decisions, and that it temper earlier unrealistic
hopes of funding all types of infrastructure projects, while
generating high returns. Perhaps the most representative
declaration was made by Zhang Jianping, director of the
Office of International Economic Cooperation of the
Academy of Macroeconomic Research in the National
Development and Reform Council (NDRC), when hesaid, “The operation of the AIIB will definitely not seek
high returns but rather to break even or earn minimal
profits.”55
The conflict between profits and fulfilling needs has
two important implications. First, the scope of projects
AIIB can support will be more limited than what was
implied by China’s ambitious claim to “fill the funding
gap in the Asian infrastructure market.” Second, the loans
provided by AIIB may not be as generous as borrowing
governments originally expected, in order for the bankto invest responsibly and earn “minimal profits.” Indeed,some Chinese finance officials have commented that AIIB
will have to follow high economic standards, despite thehigh demand, and that such standards will be very similar
to those of existing MDBs, such as the World Bank and
ADB.56
Over time, China lowered its capital contribution
to the bank, thereby limiting its veto powers. When the
MOU was first signed in October 2014, China planned
to contribute 50% of the bank’s capital, which many
assumed would translate into absolute veto power on any
issues that require a simple majority. However, as morecountries joined AIIB, China scaled back its share to 30%.

Meanwhile, a more sophisticated formula for voting rights
was adopted that combines voting shares based on capitalshares, basic voting rights and PFM voting rights. The
formula grants China 26.06% of the voting power.
Therefore, as the AOA stipulated, China will haveveto power on issues that require a supermajority vote.
As defined by the AOA, a supermajority vote of theboard of governors will require an affirmative vote of
two-thirds of the total number of governors, representing
no less than three-fourths of the total voting power of themembers.57 The AOA cites 12 issues that would require asupermajority vote:• An increase of authorized capital stock of the bank
(Article 4.3);• The initial number of shares for future members or
the changing number of shares for existing membersthat could reduce the capital stock held by regional
members below 75% of the total (Article 5.2 andArticle 5.3);• Provision of assistance to non-regional recipients(Article 11.1-b);• The total amount of outstanding loans, equity
investments, guarantees and other types of financing(Article 12.1);• Allocation of the bank’s net income to purposes otherthan reserves, retained earnings and distribution tomembers (Article 18.1);• Changes to the size and composition of the board of
directors (Article 25.2);• Functioning of the board of directors on a non-resident
basis (Article 27.1);• Election, suspension or removal of the president(Article 29.1, 29.2);• Suspension and restoration of membership (Article
38.1);• Termination of the bank’s operation (Article 41.1);• Distribution of assets to members based on theircapital subscriptions (Article 43.1);• Amendment of the AOA (Article 53.1).

54

Interviews, Beijing, June 2015.
Zhao Li, “AIIB Projects Will Not Seek High Returns and Government
Guarantee Will Counter Hidden Risks,” [亚投行项目不求高回报 政府担
保抵充隐性风险], Think.china.com, May 28, 2015, <http://www.china.com.
cn/opinion/think/2015-05/28/content_35681510.htm>.
56
Interviews, Beijing, June 2015.
55

38 Asian Infrastructure Investment Bank: China as Responsible Stakeholder?

57“AIIB Articles of Agreement,” AIIB, June 29, 2015, <http://www.aiibank.org/
uploadfile/2015/0629/20150629094900288.pdf>.

SASAKAWA PEACE FOUNDATION USA

In addition, at the level of the board of directors, aminimum of three-fourths of the vote is required for:• Decisions on major operational and financial policies
and delegation of authorities to the president under thebank policies (Article 26.ii);• Delegation of authorities to the president regarding
actual bank operations (Article 26.iii)
China’s veto power reflects China’s determination to retain
control over key aspects of the bank. Its desire to maintainveto power and certain privileges was apparent from the
beginning. When The Wall Street Journal reported in lateMarch 2015 that China would forego veto power to gain
the membership of key European countries, 58 for example,
the Chinese vice finance minister denied the report later
the same day.59 Chinese analysts acknowledge that China
would like to maintain some privileges at the bank because“China is the original advocate and the largest shareholderof the bank after all and deserves the veto power,”60 and“being the largest shareholder in the bank, China isunlikely to give up its influence in it.”61 They further argue
that China’s total share and voting rights were the natural
result of openly negotiated formulas, rather than China’s
manipulation. However, critics have pointed out that thenegotiated formulas were, themselves, the result of China’s
negotiating position and manipulation.62
Although China’s veto power is controversial, it ismore symbolic and may not be as threatening as it appears.
Issues such as the acceptance of new members do not
require a supermajority. And having veto power does notequal the power to force the board to approve whatever
China wants. Further, how often China will exercise itsveto power remains to be seen. It is highly unlikely that,on any of the critical issues mentioned above, the rest

58

Lingling Wei and Bob Davis, “China Forgoes Veto Power at New Bank to Win
Key European Nations’ Support,” The Wall Street Journal, March 25, 2015,<http://www.wsj.com/articles/china-forgoes-veto-power-at-new-bank-to-winkey-european-nations-support-1427131055>.
59
Zheng Yangpeng, “Reports on AIIB Veto Rights Denied,” China Daily,
March 26, 2015, <http://europe.chinadaily.com.cn/business/2015-03/26/
content_19912024.htm>.
60
Interview, Beijing, June 2015.
61
Chen Yang, “China Denies Reports on AIIB Veto Power,” Global Times,
March 25, 2015, <http://www.globaltimes.cn/content/914047.shtml>.
62
Interview, Beijing, June 2015.

of the bank’s members will unanimously oppose China
and so necessitate Beijing’s use of its veto. Given China’s
advantageous position at the bank and the many otherchannels at China’s disposal to influence the bank’s
decision-making (including through the many Chinese
senior staff at the bank and countries with close ties toChina), Beijing may not need to use a veto at all.
Meanwhile, a general consensus has emerged among
analysts that China must be particularly cautious inexercising unilateral veto power. China has been trying topromote the bank as a multilateral institution, rather thanits own bank. Exercising veto power would inevitably
undercut those efforts and reinforce suspicions andcriticism by countries such as the United States and Japan.
The bank will not be free from China’s special status andprivileges, but how China chooses to use its influence will
be a key indicator of China’s true intentions for the bank.
International scrutiny and pressure, combined with China’s
concern for reputation and its desire to gain recognition,
will likely have a strong impact on China’s actions.
What is more important is the extent to which China
will use AIIB to advance its own national interests andagenda. As discussed above, export promotion of Chinese
products and services, support for China’s One Belt, One
Road strategy and an attempt to gain strategic influence
were all motivations for China to set up the bank – leading
to criticism of China’s intentions. While the bank will
help aid regional development and may enhance China’s
international stature, the extent to which China lets its own
commercial and political considerations take priority inthe operation of the bank will elicit the most scrutiny in theyears to come.
Thinking inside China on this issue has also been
evolving. Indeed, there has been a debate in the Chinese
policy community over the extent to which China should
exploit AIIB to pursue Beijing’s goals of export promotion
and progress on One Belt, One Road. In an encouraging
sign, one of China’s most controversial goals in launching
AIIB – promoting exports to absorb excess capacity – has
gradually disappeared from government statements andmedia reports. Promoting exports of Chinese goods toabsorb excess capacity runs the risks of encouraging antidumping lawsuits by trading partners.
Asian Infrastructure Investment Bank: China as Responsible Stakeholder? 39

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Moreover, if China’s traditional industries simply
switch their focus from domestic to foreign markets,
without making structural changes, much-needed
economic reforms that the Xi administration seeks may
be undercut. More important, AIIB as a multilateraldevelopment bank is fundamentally different from a
Chinese trade-promotion agency; running the bank as thelatter would inevitably undermine AIIB’s legitimacy andcredibility. With more than 50 PFMs, including traditional
Western donor countries such as the United Kingdom,France and Germany, it would be difficult and problematicfor AIIB to favor Chinese exports. Indeed, the Chinese
Ministry of Finance and the Chinese leadership of the
AIIB preparatory group have repeatedly made statements
to this effect.63
The relationship between AIIB and the One Belt,
One Road strategy seems less direct and less controversial
in China, perhaps because Beijing sees both endeavors as
aimed at Asian infrastructure development and regional
connectivity. Analysts in China generally view the two
initiatives as complementary. If AIIB chooses – basedon merit and in compliance with the bank’s governanceregulations – to support suitable regional projects that
happen to fall under the One Belt, One Road strategy, thebank’s actions will be harder to criticize.
China realized that the issue of upholding standards
and regulations governing AIIB, while making practicaldecisions, presents another important issue. China
has vowed from the beginning that AIIB will deliver
funding more efficiently and effectively than the WorldBank and ADB, but the Chinese have also graduallyrealized that high-quality rules and regulations are required
for a variety of practical reasons. Good governance will
guard against bad lending decisions, benefitting both thebank and the borrowers. High standards and vigorous
oversight and management are preconditions for a good
credit rating, which directly determines the viability of
AIIB’s plan for fundraising on the international market(ADB’s rating is AAA). Moreover, given all the early
concerns regarding AIIB’s governance, transparency andaccountability, any missteps in this area will dramaticallyundermine the bank’s credibility and legitimacy.
Official statements regarding AIIB’s standards andoversight have, at best, been broad and vague, but the levelof commitment to high standards and strict oversight isunprecedented for China. China has repeatedly promisedthat AIIB will be “lean, clean and green.”64For example,
on the issue of compliance, the official website states that,“The bank will ensure that each of its operations complies
with the bank’s operational and financial policies. These
policies would be based on international best practices
and would include, among others, environmental
and social frameworks, disclosure, procurement, debt
sustainability and operations in disputed areas.”65
It also promises that, “The board of directors will
establish an oversight mechanism to supervise themanagement and the operation of the bank in line withthe principles of transparency, openness, independence
and accountability.”66 The bank’s actual practices andoperations will be the true arbiter of AIIB’s performance inthese areas. However, questions from opposing countries
and scrutiny by the international community played a keyrole in shaping China’s preferences regarding the rules ofthe bank.

63

64

It is worth noting that this position has prompted disagreement inside China.
Many domestic interest groups, such as local governments and companies, argue
that China should not be completely altruistic, and that AIIB should advance
China’s own economic agenda. More specifically, they expect China, at theminimum, to use its influence to favor domestic bidders in AIIB’s projects.

40 Asian Infrastructure Investment Bank: China as Responsible Stakeholder?

6. CONCLUSION
Despite early speculation, China did not initiate AIIB
merely as a strategic endeavor to expand its political andsecurity influence. China has had a long list of goals in
pursuing AIIB, most of which are centered on China’s
economic interests. These include expanding China’s
regional influence, “democratizing” the international
economic order, diversifying China’s investment portfolio,
promoting China’s exports, assisting China’s One Belt,
One Road strategy and internationalizing the RMB.
What China did not anticipate was the positive“China-led AIIB Will Be Lean, Clean and Green - Official,” Reuters,
April 12, 2015, <http://uk.reuters.com/article/2015/04/12/uk-asia-aiibidUKKBN0N302D20150412>.
65“Key Provisions,” AIIB, <http://www.aiibank.org/html/pagefaq/Key/>.
66
Ibid.

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reception from most of the international community.
Non-regional countries, including more than a dozen
advanced economies, applied to become PFMs. Theirenthusiasm belied China’s assumption that the developed
countries would reject the new institution, and the bank’s
membership would consist overwhelmingly of Asiandeveloping countries, with China playing the dominantrole. The participation of Western and other developed
countries has greatly boosted AIIB’s credibility andlegitimacy, a result that, in light of U.S. opposition, China
views as a diplomatic victory over Washington.
At the same time, the negotiations establishing
AIIB provide an example of how China’s behavior canbe influenced by the international community. Upon
joining the bank, the PFMs, including developed country
members, were able to use their bargaining power tonegotiate, guide and shape the bank’s AOA from within
and enmesh China in a network of international norms
and standards. Opposition and criticism from the UnitedStates and Japan also played an important role in reining
in China’s ambitions and advocating for its own agenda.
Although many details have yet to be worked out, AIIB
today is very different from the bank China envisioned
before March 2015. China adapted its expectations andposition to meet changing realities. That flexibility, byitself, has been a positive development. Countries may still
perceive AIIB as a case of China challenging the existing
international system, but the development of AIIB also
demonstrates that the existing system has the power tobalance and shape that challenge, check China’s ambitions
and make China play by the rules.
AIIB must continue to address the challenges andcontradictions posed by the ambitions the bank has in
Asian infrastructure development. A balance must be
struck between the vast demand for Asian infrastructure
funds and the high standards the bank has pledged
to follow, as well as between building a high-quality
multilateral development bank and accommodating
China’s own goals. While the AOA has been published,
many details have yet to be finalized and disclosed.
Observers will pay special attention to these details as
they are determined over such issues as China’s exercise
of veto power, AIIB projects’ links to China’s export

promotion efforts and broader policy agenda, thebank’s governance practices and compliance policies,
its fundraising models and the loans it makes. China
has successfully completed the first stage of AIIB’s
establishment, but many important challenges lie
ahead. Ultimately, the bank will be judged by its actual
performance.

Asian Infrastructure Investment Bank: China as Responsible Stakeholder? 41

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The U.S. Response to the AsianInfrastructure Investment Bankby Tobias Harris

1. INTRODUCTIONOn April 28, 2015, U.S. President Barack
Obama held a joint press conference withJapanese Prime Minister Abe Shinzo in the
White House Rose Garden. Asked about
the strategic significance of the Asian Infrastructure
Investment Bank (AIIB), President Obama sought todispel the notion that the U.S. government opposes thecreation of AIIB, saying:
Asia needs infrastructure. There are a lot of countries
that have difficulty financing infrastructure, but if they
got that infrastructure put in place and developed,
they can grow much more rapidly. And that’s good foreverybody. It’s good for that country. It’s good for theworld economy. It’s good for us. We want more markets
to be able to get our goods in and sell our services thatare some of the best in the world. And China has got a
lot of money. It’s been running a big surplus for quite
some time. So to the extent that China wants to put
capital into development projects around the region,that’s a positive. That’s a good thing.1

Obama then went on to stress the importance of highquality governance and lending standards for AIIB.
“Let’s just make sure that we’re running it based onbest practices,” he said, adding that he looks forward tocollaborating with the new bank on development projects.
In his remarks, Obama signaled that his administration
1

The White House, “Remarks by President Obama and Prime Minister Abe ofJapan in Joint Press Conference,” April 28, 2015, <https://www.whitehouse.gov/
the-press-office/2015/04/28/remarks-president-obama-and-prime-minister-abejapan-joint-press-confere>.

was prepared to move past hostility towards the bank andis willing to recognize that, with AIIB taking form, the U.S.
government should try to push it in more constructive
directions.
Unfortunately, this shift in the Obama administration’s
perspective came only after the U.S. government sufferedan embarrassing defeat when the United Kingdom’s
decision in early March to join AIIB led to a stampede ofother U.S. allies, including France, Germany, Italy, South
Korea and Australia, into the bank, ahead of the March
31st deadline to sign up as founding members. And eventhen, the administration was slow to recognize that it
had to change its tone on AIIB. After the UK joined, ananonymous senior official told the Financial Times thatthe decision was another example of the UK’s “constantaccommodation” of China.2
The Obama administration’s response to the AIIB
initiative encapsulates the problems with the politicaland economic dimensions of its Asia rebalance strategy.
Confronted with China’s proposal, the administration
struggled to see the upside of AIIB. Beijing was not only
seeking a multilateral solution to an important regional
problem, but also actively pursuing technical assistancefrom experts with long experience in managing existingdevelopment banks, including the Asian Development
Bank (ADB). Instead, Washington focused entirely on

2

Geoff Dyer and George Parker, “US attacks UK’s ‘constant accommodation’with China,” Financial Times, March 12, 2015, <http://www.ft.com/intl/
cms/s/0/31c4880a-c8d2-11e4-bc64-00144feab7de.html>.

Asian Infrastructure Investment Bank: China as Responsible Stakeholder? 43

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the threat to existing international financial institutions,the risks to borrowers and the broader threat to the
U.S.-led international economic order. For these reasons,as China’s initiative took shape, the U.S. government
devoted more energy to dissuading its allies and partners
from participating than seeking a way to engage AIIB
constructively or offering alternatives for addressing theregion’s infrastructure gap.
Ultimately, the Obama administration’s Asia
“rebalance” will require subtlety above all else. The
United States will have to find ways to accommodate
China’s desire to wield greater power in Asia, particularly
when China pursues multilateral solutions to regional
problems. The United States cannot afford to take arelentlessly oppositional stance when China offers to workwith others, not least because – as this episode shows – thesheer size of China’s economy means that Washington
cannot assume that its allies and partners in Asia andworldwide will share its approach. The mishandling of
AIIB also illustrates the need for a genuinely “wholeof-government” approach to Asia, not only within theexecutive branch but also including the U.S. Congress.3
This paper explores how the Obama administration
responded to the AIIB initiative, focusing on interagency
debates and outreach to U.S. allies as they considered
China’s proposal. It then considers whether the UnitedStates could have responded differently and the factorsthat led the Obama administration to react defensively. It
concludes with lessons learned from the administration’s
handling of the issue.

2. THE REBALANCE AND CHINA’S RISE
The Obama administration has made strengthening
U.S. leadership in Asia a top priority of its foreign policy.
Through its Asia “rebalance” strategy – also known as the“pivot to Asia” – the Obama administration has sought topreserve and extend the U.S. position in the Asia-Pacificregion, correcting the imbalance that resulted from two

3

Daniel Drezner, “Anatomy of a whole-of-government foreign policy
failure,” PostEverything, March 27, 2015, <http://www.washingtonpost.com/
posteverything/wp/2015/03/27/anatomy-of-a-whole-of-government-foreignpolicy-failure>.

44 Asian Infrastructure Investment Bank: China as Responsible Stakeholder?

protracted wars in Central and Western Asia. As thenSecretary of State Hillary Clinton explained, “One of
the most important tasks of American statecraft over the
next decade will therefore be to lock in a substantially
increased investment – diplomatic, economic, strategic,
and otherwise – in the Asia-Pacific region.”4
However, from the inception of the rebalance, theadministration has had to counter accusations that its
Asia strategy is actually a containment strategy aimed at
China.5 Critics have stressed that, by strengthening ties
with old allies and forging new security partnerships
with China’s neighbors, the United States has risked
triggering Chinese fears of encirclement.6 As a result, theUnited States has had to engage in high-level diplomacy
to reassure China that the administration sees it as animportant partner, while reassuring East and Southeast
Asian partners and allies that U.S. security commitments
remain ironclad, even in the face of Chinese assertivenessin territorial disputes. The point is not that the UnitedStates has succeeded in assuaging Chinese fears or
reducing tensions between China and the United Statesand its allies, but that the administration believes it isimportant to avoid the impression that it seeks tocontain China.
Accordingly, President Obama and other senior
officials have repeatedly stated that the United States does
not aim to contain China’s rise. In fact, Obama did so ina joint press conference with Chinese President Xi
Jinping during the Asia Pacific Economic Cooperation(APEC) summit in Beijing in November 2014, shortly
after two major U.S. allies decided not to join AIIB.
The president said, “I have repeatedly reiterated anddisplayed through the actions of our administration that
we want China to succeed. And we actively encourage our

4

Hillary Clinton, “America’s Pacific Century,” Foreign Policy (November 2011),<foreignpolicy.com/2011/10/11/americas-pacific-century/>.
5This impression has been strengthened by the perception that the militarycomponent has been implemented more extensively than the political or
economic components of the rebalance. See U.S. Senate, Committee on Foreign
Relations, Re-balancing the Rebalance: Resourcing US Diplomatic Strategy in
the Asia-Pacific Region: A Majority Staff Report (April 17, 2014), <http://www.
foreign.senate.gov/imo/media/doc/872692.pdf>.
6See, for example, Robert S. Ross, “The Problem with the Pivot,” Foreign
Affairs (November/December 2012), <https://www.foreignaffairs.com/articles/
asia/2012-11-01/problem-pivot>.

SASAKAWA PEACE FOUNDATION USA

friends and allies in the region to foster a strong
and cooperative relationship with China.”7
U.S. officials have, for years, called upon China to
act as a “responsible stakeholder,”8 a country that, inthen-Deputy Secretary of State Robert Zoellick’s words,“[recognizes] that the international system sustains
their peaceful prosperity, so they work to sustain thatsystem.” However, the United States has not been as
sensitive when it comes to multilateral political andeconomic institution building. Instead, Washington has,at times, seemed content to permit the emergence of “rival
regionalisms.”9 Rather than welcome a greater Chineserole in regional institutions, challenging Beijing to act asa responsible stakeholder, the United States has seemed,at best, resigned and, at worst, hostile to China’s efforts
to create its own institutions outside the existing regionalarchitecture. While China has its own reasons for wanting
to build new regional institutions, Washington has failed
to use multilateral organizations as a means to give Chinaa greater stake in the existing order and to counter theargument that the United States seeks to contain orotherwise limit China’s power in Asia.
It is, to some extent, understandable that the UnitedStates is defensive about the China challenge to existing
institutions. The existing system of international financial
institutions, built and sustained by the United States andits allies, is an important pillar of the global economy anda tool by which the U.S. wields global influence. As John
Ikenberry, professor at Princeton University’s Woodrow
Wilson School of Public and International Affairs, hasargued, liberal, multilateral institutions have enabled theUnited States to signal its benign intentions and bolster its
position by tying its own hands, taking the time to listen to
weaker states and providing global public goods.10 But the

7

The White House, “Remarks by President Obama and President Xi Jinping
in Joint Press Conference,” Beijing, November 12, 2014, <https://www.
whitehouse.gov/the-press-office/2014/11/12/remarks-president-obama-andpresident-xi-jinping-joint-press-conference>.
8
This phrase, first used during the Bush administration by Deputy Secretaryof State Robert Zoellick, was also used repeatedly by former Secretary of State
Clinton, though not by Secretary of State John Kerry.
9
Ellen Frost, Rival Regionalisms and Regional Order: A Slow Crisis ofLegitimacy, NBR Special Report #48 (December 2014).
10
G. John Ikenberry, Liberal Leviathan (Princeton: Princeton University
Press, 2011).

United States does not strengthen its position in the region
by forcing Asian countries to choose between U.S.-led
institutions or newcomers initiated by China.
Washington needs to prepare for an era in which Asia
is governed by overlapping clusters of institutions, someled by the United States and its allies, some led by China,
still others spearheaded by the Association of Southeast
Asian Nations (ASEAN), all of which can contribute toresolving disputes and promoting regional integration.
The failure of officials across the U.S. government torecognize this emerging reality lies at the heart of the
Obama administration’s mishandling of AIIB.

3. THE U.S. RESPONSE TO AIIB
The defensiveness of the Bretton Woods institutions can beseen in a January 2015 op-ed by Nathan Sheets, U.S. Under
Secretary of the Treasury for International Affairs, which
was essentially the first official statement by the Obamaadministration in response to AIIB. Sheets explained thevalue that U.S.-led multilateral development banks (MDBs)
have provided since 1945, noting their high standards interms of transparency, debt sustainability, the environment
and project procurement. After making the case for theincumbent MDBs, Sheets addressed the newest institutions,
AIIB and the BRICS countries’ New Development
Bank. “The United States stands ready to welcome new
institutions into the international development architecture,”
he wrote, “provided that they share the international
community’s strong commitment to complementing theexisting institutions and maintaining time-tested, and everimproving, principles and standards.”11
The article’s tone can be best described as“grudging.” Sheets accepts that AIIB will exist, but focuses
mainly on explaining the United States’ conception ofbest practices for MDBs. There is no acknowledgementof Asia’s infrastructure gap or appreciation that China
is seeking to shrink the gap through multilateral means,rather than investing money through bilateral mechanisms.
In short, after nearly a year of deliberations about how to
respond to AIIB, in January 2015 the U.S. government
11

Nathan Sheets, “Building a global infrastructure for growth,” CNBC, January
7, 2015, <http://www.cnbc.com/id/102318050>.

Asian Infrastructure Investment Bank: China as Responsible Stakeholder? 45

SASAKAWA PEACE FOUNDATION USA

was still more focused on citing the shortcomings of thenascent, China-led MDB than offering a constructive
response to Asia’s need for infrastructure investment.
Sheets alluded to ways in which existing institutions“continue to evolve to meet global challenges, to enhancetheir efficiency and efficacy,” but offered no concrete
proposals for how the United States and U.S.-led
institutions intend to address the infrastructure problem.
The formula used by Sheets in his article – theUnited States welcomes AIIB but with extensive caveats
pertaining to standards – remains the U.S. position,
despite the more positive overtones in Obama’s joint press
conference with Abe. As Under Secretary of State for
Political Affairs Wendy Sherman said in a speech at theCarnegie Endowment for International Peace on February
27, 2015, “The United States welcomes new initiatives,
such as the China-proposed Asian International [sic]Infrastructure Bank, provided its founding documents
and practices uphold the high standards of otherdevelopment institutions.”12
It took more than a year for the Obamaadministration’s position to evolve only marginally fromthe grudging disapproval in the Sheets’ article to what
can be described as “grudging acceptance.” The UnitedStates has arrived at this position only after ignoring
AIIB, debating whether there were any way for theadministration to kill the proposal and dissuading allies
from joining. The U.S. focus has been narrow and negative– problems with the bank, its membership, its relationshipwith other institutions – instead of offering a response that
addresses the issues raised by China’s proposal.
For six months following Chinese President Xi
Jinping’s announcement in October 2013 that China
intended to create AIIB, the Obama administration
simply ignored the proposal. U.S. diplomats and officials
in the region, who were watching AIIB take shape, havesaid that they were unable to get much of a response
from Washington. In the words of one analyst, theadministration was “asleep at the switch.” It was not untillate spring 2014, when Chinese officials began fleshing out
the proposal and enlisting founding members that the U.S.
government began to react.
When the Obama administration did react, thefirst instinct of international economic policymakers at
the White House and the Treasury Department was,according to one official involved in the initial discussions,to ask whether there were a way to prevent the bankfrom coming into existence. Concluding that there wasprobably nothing the United States could do to prevent
China from establishing AIIB, the administration’s
approach shifted from trying to block its creation totrying to limit its influence and prevent wealthy,
democratic U.S. allies from joining and providing itwith greater legitimacy.
Questioning China’s plans for AIIB’s governanceand lending standards has been central to this approach.
As noted previously, on the handful of occasions that U.S.
government officials have spoken publicly about AIIB,
they have voiced concerns that the bank would not be
sufficiently transparent, particularly over its procurement
decisions, and that its social, labor and environmental
standards would be weaker than those of other MDBs.
They have also expressed concerns that AIIB would
be redundant with existing MDBs, including the AsianDevelopment Bank (ADB) and the World Bank.
U.S. participation in AIIB appears to have not been
considered. Even had the Obama administration wanted
to join, it would have struggled to convince the U.S.
Congress to allocate funds to enable the United States toparticipate in a Chinese-led development bank. Rather,
the focus of U.S. policymakers was on U.S. allies that
China approached about joining. While both the U.S. andAustralian media reported that the United States explicitly
asked its allies not to join AIIB, an official involved in
the policy process suggested that the administration’s
response was more measured. The administration did
not “twist arms,” according to the official, although thatapproach was admittedly considered.13 Instead, when12

See Biswa Nath Bhattacharyay, Masahiro Kawai, and Rajat M. Nag,
Infrastructure for Asian Connectivity (Northhampton, MA: Asian Development
Bank Institute and Asian Development Bank with Edward Elgar, 2012). Chapter
two, “Estimating demand for infrastructure, 2010-2020,” explains the basis for$8 trillion estimate.

46 Asian Infrastructure Investment Bank: China as Responsible Stakeholder?

13

For a different view, see John Kehoe, “We didn’t veto Asia bank: US,”
Australian Financial Review, January 24, 2015. Kehoe says Evan Medeiros,
senior director for Asia at the National Security Council, denied that the United

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approached by allies about AIIB, the United States
discussed whether the institution would have adequate
safeguards, noting that, “The worst thing would be
to build lots of highways and dams but ignore labor,
the environment, and human rights.”14 By articulating
concerns about AIIB standards, the U.S. government wasable to provide U.S. allies with questions to ask China
when they were invited to join.
Australia and South Korea were targets of extensive
Chinese lobbying regarding the bank and were the allies
with which the United States had the most extensive
discussions. Bringing either country into AIIB would have
immediately bolstered the bank’s legitimacy, as eventually
happened when the UK’s decision to join cleared the way
for Australia and South Korea to reverse earlier decisions
to stay out.
Canberra appeared to have been leaning towards
joining until the final weeks before the memorandum of
understanding was signed on October 24, 2014. Prime
Minister Tony Abbott has, at times, referred to himself
as an “infrastructure prime minister,”15 and the Abbott
government made global infrastructure investment a
priority for its 2014 leadership of the G20. The Australian
government struggled to balance its economic priorities
and its relationships with China on the one hand andthe United States and Japan on the other. The Abbott
government resolved the tension between these positions
by asking China pointed questions about AIIB in a “nonpaper” drafted by the Australian treasury and delivered
to Beijing in June 2014. In the non-paper, which echoes
many of the U.S. government’s concerns, the Australian
government asked for clarity on AIIB’s:• Purpose and functions;• Types of infrastructure projects in which the bankintended to invest;• Membership and governance structure anddistribution of power on the bank’s board;States explicitly pressured Australia, but Kehoe cites anonymous sources who
claim U.S. pressure was explicit.
14
Interview, February 2015.
15
Prime Minister of Australia, “Address to the World Economic Forum,” Davos,
Switzerland, January 23, 2014, <https://www.pm.gov.au/media/2014-01-23/
address-world-economic-forum-davos-switzerland-0>.

• Capital structure and intentions regarding its credit
rating;• Borrowing, lending and investment procedures.
The non-paper also posed difficult technical questions,but it appears to have been written with a view towards
eventual Australian participation. While the Abbott
government eventually decided not to sign on to thememorandum of understanding in 2014, reports suggestthat the Australian government conducted an extensive
internal debate over whether it was better to join andshape the institution from within, or whether it should
refrain from legitimizing a new institution that seems
aimed at challenging incumbent institutions dominatedby the United States and Japan. It is possible that U.S. andJapanese pressure tipped the balance in the Australiandebate, but the non-paper suggests that, even without
U.S. outreach, the Australian government would not join
AIIB lightly.16 Nevertheless, Australia’s decision not to join
proved controversial domestically, and it is not surprisingthat Australia reversed course and decided to join once theUnited Kingdom signed up as a founding member.
Despite growing economic and political ties with
China, South Korea shared both U.S. and Australianconcerns regarding AIIB, although it is possible that had
Australia joined, South Korea would have joined as well.
South Korea was not subjected to the same amount oflobbying by U.S. officials as Australia, which may reflect
both greater Australian interest in AIIB and the perceptionthat Australian participation would be a bigger victory for
China. One of the few public statements by a U.S. official
regarding AIIB was made in an interview by the Yonhap
News Agency with Sydney Seiler, then-director for Korea
at the National Security Council (NSC). Seiler offered adefense of the existing development institutions, especially
ADB, questioning the need for AIIB when high-standard
institutions already exist.17 Seiler’s intervention, days
after China asked South Korea to join, appeared to have
16

Both President Obama and Japanese Prime Minister Abe may have explicitly
urged Abbott not to join AIIB. Philip Coorey and Greg Earl, “China bank:
Abbott held talks with Abe,” Australian Financial Review, November 1, 2014.
17“US official expresses strong skepticism about China’s push for new
development bank,” Korea Times, July 8, 2014, <w.koreatimes.co.kr/www/news/biz/2015/03/602_160589.html>.

Asian Infrastructure Investment Bank: China as Responsible Stakeholder? 47

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convinced Seoul to delay participation.
It is worth noting, however, that, although the Obamaadministration was initially able to convince Japan, South
Korea and Australia to remain out, the ten ASEAN
countries and India joined – countries that stand to gain
the most from new infrastructure investment. In short,even though the United States has convinced China that
AIIB needs to have higher standards (see Yun Sun’scontribution in this volume) the United States ceded
ground in Asia by failing to pitch its response to theregion’s emerging economies.

4. MISSED OPPORTUNITY FOR
U.S. LEADERSHIP
Despite the prevailing impression that the Obamaadministration’s response to AIIB was badly mishandled,
it cannot be characterized as a total failure. AIIB is
gradually evolving in a manner that conforms to the
U.S. government’s emphasis on high standards. U.S.
pressure, whether explicit or implicit, convinced key allies
to withhold participation – and thereby the legitimacythat participation would confer – until China offeredconcessions on the bank’s architecture. And AIIB, farfrom trying to unseat the World Bank and ADB, is looking
to both for guidance, personnel and technical assistance.
In fact, China has been receptive to criticism and eager
to work with rich countries and incumbent institutions
to ensure that AIIB performs its job well. In addition tonaming a former ADB vice president, Jin Liqun, as thebank’s first president, the bank has looked to hire otherformer ADB officials and reached out to ADB fortechnical assistance.
However, even if AIIB develops into a high-quality
international financial institution that complements
existing institutions, by focusing solely on the bank’s
technical aspects the Obama administration missed an
opportunity to advance the U.S. strategic position in Asia.
The United States would have looked more serious andengaged in the region if the Obama administration had met
the challenge posed by AIIB by outlining new initiatives
to tackle the infrastructure gap or by reforming ADB andother development institutions by granting greater stakes

48 Asian Infrastructure Investment Bank: China as Responsible Stakeholder?

to China and Asia’s other emerging economies. Its actions
would have lived up to the vision, outlined in the rebalance
strategy, of U.S. leadership committed to solving regional
problems. Instead, the U.S. government conveyed theimpression that it is more interested in having the UnitedStates and its allies take the lead in writing rules for Asia in
the twenty-first century than in solving widely recognizedproblems. President Obama reinforced this impression
when making the case for the Trans-Pacific Partnership(TPP) in his 2015 State of the Union address, when hesaid, “But as we speak, China wants to write the rules forthe world’s fastest-growing region. That would put ourworkers and our businesses at a disadvantage. Why would
we let that happen? We should write those rules.”18
Demanding that Chinese-led institutions conformto high standards and safeguards seems consistent with
the U.S. government’s longstanding insistence that China
act as a “responsible stakeholder.” However, the innate
hostility to China’s AIIB proposal and the argument that
the United States and China are engaged in a race to build
Asian institutions and write the rules of regional economic
governance suggest that the positive-sum approach
may be giving way to a zero-sum worldview in which
any measure to exercise regional economic leadershipcomes at the expense of U.S. leadership. From the U.S.
response to AIIB, Beijing could reasonably conclude that
“responsible stakeholder” actually means being a passive
member of organizations in which China holds stakes
incommensurate with its economic power. As Australianacademic Peter Drysdale has written, “The Chinese cando whatever infrastructure financing they wish unilaterally,
but they have chosen to offer multilateral partnership in
this initiative. It should take no more than a nanosecond
to conclude that countries such as Australia, Korea, Japanand the United States should partner in this enterprise.”19
In short, by focusing on institutional standards insteadof on the larger strategic picture – welcoming China’s
intention to contribute to the provision of regional public
18

The White House, “Remarks by the President in State of the Union Address,”
January 20, 2015, <http://www.whitehouse.gov/the-press-office/2015/01/20/
remarks-president-state-union-address-january-20-2015>.
19
Peter Drysdale, “China’s new bank a strategic choice,” Australian Financial
Review, September 22, 2014, <http://www.afr.com/news/world/asia/chinas-newbank-a-strategic-choice-20140922-jflqw>.

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goods – the United States disregarded the principles of its
own Asia strategy and contributed to the impression thatit seeks to contain China. Contrast this with World Bank
President Jim Yong Kim’s response to AIIB. Asked about
AIIB while visiting China in July 2014, Dr. Kim said:
We think that the need for new investments ininfrastructure is massive and we think that we can work
very well and cooperatively with any of these new banks
once they become a reality.
In fact we have been going through a reform process
at the World Bank Group over the past year, precisely
because we knew that there would be new entrants inthe business. We feel that our advantage is that we have
70 years of experience and we have the best technicalknowledge, knowledge not just of papers and evidence
and data, but we have experience of putting together
actual solutions to problems. So we’re now preparedwith our global practices and cross-cutting solutions
areas to work very closely with the BRICS Bank or the
Asian Infrastructure Investment Bank and provide themwith the kind of knowledge and solutions that would
help them be more effective in building infrastructure indeveloping countries.
So for us, our competition is poverty, our enemy is lackof economic growth. Another enemy is a growth that’s
not inclusive. So as long as we’re clear on what we’re
doing and what we’re battling, we have actually no
choice but to welcome any new entrants, because every
new entrant will help us battle poverty and help us toshare prosperity.20

While the United States could not respond in the sameterms as the World Bank, Dr. Kim’s remarks suggestthat the Obama administration lost sight of the problem
that needs to be addressed. To the extent that ASEAN
countries, the primary beneficiaries of AIIB, believed that
the United States was ignoring their interests and forcing
them to choose between the United States and China on
this issue, Washington’s response handed China a victoryin the battle for hearts and minds in Asia.
This is not to say that standards and best practices
for multilateral institutions are unimportant. The MDBs
20

The World Bank, “Transcript of Press Conference with World Bank Group
President Jim Yong Kim and IFC EVP and CEO Jin-Yong Cai in Beijing,”
July 8, 2014, <http://www.worldbank.org/en/news/speech/2014/07/08/pressconference-world-bank-group-president-jim-yong-kim-ifc-ceo-jin-yong-caibeijing>.

have spent decades learning how to balance poverty
alleviation, debt sustainability and environmental andsocial responsibility in their projects.21 High standards arenecessary if China is to be a responsible stakeholder. But
the United States should offer advice and assistance outof a good-faith belief that the region will be better if China
seeks to wield power through multilateral institutions,even imperfect institutions, than if China acts unilaterally.
If the United States is to continue to play a leadership rolein East Asia and to be involved in shaping the region’s
institutional environment – as the rebalance strategy
envisions – it cannot just seek opportunities for the UnitedStates to write the rules. It has to find and welcome
opportunities for China to participate as well. The Obamaadministration may gradually be moving in this direction
when it comes to AIIB, particularly as AIIB’s standards
evolve and as wealthy democracies join the institution.

5. WHY THE U.S. ERRED
The key questions going forward are why the U.S.
government’s initial reaction was defensive and whether it
is possible to learn from this experience to avoid repeating
the same mistakes in the future. Perhaps the mostimportant thing to note about the Obama administration’s
AIIB policy is that, rhetoric notwithstanding, it would bea mistake to conclude that the response to AIIB was the
product of a deliberate plan to contain China. Instead, theadministration may have opted for a policy of undermining
AIIB because it was the path of least resistance – andinstitutional factors made it more difficult to opt for a
subtler, accommodating response to the bank.
First, devising a more nuanced approach may havetaken time and energy that policymakers simply did
not have. Beijing’s campaign to enroll members into
AIIB coincided with the deepening crisis in Ukraine
and the emergence of the Islamic State of Iraq and theLevant (ISIL). Both crises may have made the Obamaadministration acutely sensitive to perceived threats to
the global order, priming the U.S. government to react
defensively to what it perceived as a Chinese challenge to
21

See, for example, Shawn Donnan, “World Bank chief warns of surge in people
facing resettlement,” Financial Times, March 4, 2015.

Asian Infrastructure Investment Bank: China as Responsible Stakeholder? 49

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the Asian regional order.
Policymakers may have also reacted defensively inpart because they had limited information about China’splans for AIIB, which China was slow to provide. Had
China been more deliberate in its rollout proposal andreached out to the United States earlier in the process, it
might have forestalled some of the acrimony with which
the Obama administration greeted the proposal. It was
only in September 2014 that Jin Liqun, the incoming AIIB
president, visited Washington to reassure U.S. experts
and officials that China was trying to address criticisms
about the bank’s structure, well after the United States had
decided to lobby allies not to join the organization.
Additionally, the U.S. international economic
policymaking apparatus may have predisposed the U.S.
government towards a defensive reaction to China’s
proposal. The Treasury Department and Treasury officials
working at the NSC dominated the U.S. government’s
formulation of a response. The Treasury view was heavily
influenced by a belief in the sanctity of the Bretton Woods
institutions, including MDBs like ADB, and as a result,it instinctively sought to uphold the primacy of theincumbent institutions when confronted with a challenge.
U.S. economic policymakers reacted similarly in
1997, when, in the midst of the Asian financial crisis,
Japan argued for the creation of an Asian Monetary Fund
(AMF) that would provide an Asia-led response to balanceof payments crises. Indeed, the arguments made by U.S.
Treasury officials against Japan’s AMF proposal in 1997
were similar to the arguments U.S. officials would later
make in 2014 against AIIB. They stressed that an AMF
would duplicate the function of existing institutions; theyargued that it would have lower standards than existing
institutions (in this case that its lending would lackconditionality, the requirement that borrowers implement
structural reforms); and they argued that it was a Trojan
horse by which a regional power sought to marginalize theUnited States and claim hegemony for itself.22
Participants in the debate over AIIB suggest that there
were officials in Treasury’s Office of International Affairs

who welcomed China’s determination to contribute tosolving a regional problem, but who argued for a morenuanced response, believing the United States shouldhave laid out its concerns publicly, early in the process.
However, the debate was dominated by a small numberof players, and officials advocating for a more subtle
response, whether at the Treasury Department, the
NSC or the State Department, struggled to push theadministration in this direction. The State Department’s
Economic and Business Affairs and East Asia and PacificBureaus, which may have wanted to ensure that theadministration’s response was consistent with the broader
goals of the rebalance strategy, played, at best, a marginalrole in formulating policy. Some observers have suggested
that the Treasury view prevailed, in part because the NSC
has expanded in size – according to David Rothkopf,
CEO and editor of The FP Group, it now has nearly
400 people, “twice as large as during the early Bushyears”23 – limiting its ability to craft an approach that
defends global standards for multilateral institutions whilestill accommodating a greater role for China in global
economic governance.
The Japanese government’s opposition to AIIB
may also have shaped the U.S. government’s defensive
response. Both because the Japanese government wants toensure that ADB, in which Japan is the largest shareholder
along with the United States, remains Asia’s preeminent
development bank, and because the Japanese governmentis acutely sensitive to the contest with China for influence
in Southeast Asia, the Abe government was, if anything,even less favorably disposed to AIIB than the Obamaadministration. As noted previously, Tokyo may have beeneven more explicit than Washington in urging Canberra
to stay out, leveraging Prime Minister Abe’s personalrapport with Prime Minister Abbott. This is not to saythat the U.S. government simply followed Japan’s lead on
AIIB, but opposition from the leading U.S. ally in Asia
likely made it more difficult for officials in favor of a more
accommodating response to win the debate. After all, by
trying to limit the influence of AIIB and preserve ADB’s

22

23

See Philip Lipscy, “Japan’s Asian Monetary Fund Proposal,” Stanford
Journal of East Asian Affairs 3, 1 (Spring 2003).

50 Asian Infrastructure Investment Bank: China as Responsible Stakeholder?

David Rothkopf, “Can Obama’s foreign policy be saved?” Foreign Policy,
September 9, 2014, <foreignpolicy.com/2014/09/09/national-insecurity/>.

SASAKAWA PEACE FOUNDATION USA

predominance, the U.S. government would not just be
defending ADB, it would be upholding a leadership rolefor Japan.
Finally, as former Federal Reserve Chairman
Ben Bernanke and others have argued,24 the Obamaadministration may have been constrained by the U.S.
Congress. There is no evidence that members of Congress
expressed any interest, positive or negative, in China’s
AIIB proposal. However, Congress is not only responsible
for authorizing U.S. contributions to MDBs and otherinternational financial institutions but must also approve
any changes to the governance and structure of MDBs.
It is noteworthy that, even as China was pledging tens ofbillions of dollars to stand up AIIB, the U.S. Treasury has
struggled to get Congress to meet the U.S. commitments
to ADB and the Asian Development Fund (ADF), whichmakes concessional loans for poverty alleviation. U.S.
arrears to ADF totaled $326.7 million at the endof FY2014 and could eventually affect the U.S. sharein the fund.25
In light of Congress’s inability to fund existingcommitments to Asian development assistance, theObama administration may have been unable to offer
concrete proposals to counter AIIB – for example, byreforming shares at ADB or increasing the bank’s support
for infrastructure lending. For the same reason, U.S.
membership in AIIB is unthinkable for the foreseeable
future, despite the decision by U.S. allies to join the bank.
As the prolonged debate over Trade Promotion Authority
and the Trans-Pacific Partnership (TPP) in Congresssuggested, while individual members of Congress fromboth parties recognize that Congress has an important roleto play in ensuring that the United States has the resources
with which to exercise leadership in Asia, Congress as an
institution struggles to make decisions that advance thestrategic interests of the United States.

24

David Pilling and Josh Noble, “US Congress pushed China into launching
AIIB, says Bernanke,” Financial Times, June 2, 2015, <http://www.ft.com/intl/
cms/s/0/cb28200c-0904-11e5-b643-00144feabdc0.html>.
25
US Department of the Treasury, “Justification for Appropriations – FY2015
Budget Request.” <http://www.treasury.gov/about/budget-performance/
Documents/JFA_TREASURY_INTERNATIONALPROGRAMS_508_3414.
pdf>.

6. LESSONS LEARNEDThis analysis suggests that there are four lessons the U.S.
government should draw from its confrontation with
China over AIIB.
First, the U.S. government’s first response to China’s
efforts to create new institutions or otherwise write theregion’s rules should not be “how do we stop this?”
AIIB will not be the last time that China proposes a new
institution. The United States by no means has to accept
or participate in every institution China proposes, butwhen the institution is designed to address a widely
acknowledged problem, the U.S. government needs tooffer its own solution rather than defending the status quo
for its own sake.
Second, the United States must avoid zero-sum
thinking when it comes to agenda setting and institution
building in Asia. Legitimate U.S. leadership in Asia
requires not just trumpeting U.S. values and interests
but also listening to the concerns of other countries in
the region, especially the region’s small and medium-size
powers. The United States is competing with China notover who gets to write the rules in the twenty-first century
but over whose position in the region is seen as mostlegitimate and respectful of the sovereignty and national
interests of all countries in the region. As an offshore
power with a long history of sustained bilateral andmultilateral engagement in Asia, the United States actually
enjoys a considerable advantage, whereas China is locked
in protracted territorial disputes with the same countries it
is trying to pull into its orbit through trade and investment.
The United States must be careful not to squander thisadvantage by pressuring its allies and partners to choose
between the United States and China or by letting the“great game” with China take precedence over regional
problem solving.
Third, as the United States has learned through its
own experience with multilateral institutions – especiallymultilateral development institutions – it is difficult
to run them well. The United States could, therefore,
afford to be more sanguine towards China’s multilateral
initiatives. As China has already discovered with AIIB,
a genuinely multilateral institution is difficult for a single
country to dominate. Essentially, China’s pursuit of
Asian Infrastructure Investment Bank: China as Responsible Stakeholder? 51

SASAKAWA PEACE FOUNDATION USA

multilateral institutions could work in favor of the UnitedStates, regardless of how the institutions turn out. If theinstitutions succeed, it means that China has accepted theconstraints that come with participation – that, in effect,
China has accepted the logic of Washington’s “responsible
stakeholder” argument. If the institutions fail because
China has alienated other participating countries, theincumbent multilateral institutions will look even better bycomparison.
Finally, the United States and its allies should takeseriously China’s complaint that its role in international
financial institutions is incommensurate with its wealth.
The United States cannot be surprised that China,
India and other emerging economies want to create new
institutions, when the incumbent institutions have notshifted to reflect the new global distribution of wealth.
If the United States wants China to be a responsible
stakeholder within the existing order and not create new
institutions, it has to give China an appropriate stake inthe existing order. While the domestic and international
politics of reallocating shares in international financial
institutions are complicated, if the United States wants the
Bretton Woods system to endure, it has to exert political
capital to ensure that the system evolves with the global
economy.

52 Asian Infrastructure Investment Bank: China as Responsible Stakeholder?

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ABOUT THE AUTHORS
Daniel Bob is Director of Programs and Senior Fellow
at Sasakawa Peace Foundation USA. Previously, heworked on the Senate Finance and House Foreign Affairs
Committees handling Asia Pacific issues. He was also an
International Affairs Fellow in Japan with the Council
on Foreign Relations, CEO of a Washington- and Seoulbased firm providing advisory services on energy andeducational projects, Senior Advisor to the Director of
the Office of Federal Housing Enterprise Oversight, theagency overseeing the multi-trillion dollar U.S. secondary
mortgage market and Senior Advisor at Reed Smith, aninternational law firm. In 2008, he worked as an advisor
on Asian affairs for the Obama campaign. A member of
the Council on Foreign Relations, Mr. Bob has served
as Visiting Scholar at Keio University and as Research
Advisor for the Pudong Academy of Development in
China. Mr. Bob holds a bachelor’s from Yale, a master’sfrom Harvard and was a Fulbright Scholar in Fiji.
Tobias Harris is the Economy, Trade, and Business
Fellow at Sasakawa Peace Foundation USA. He is also
an analyst of Japanese politics and economics at Teneo
Intelligence, a political risk advisory firm. Harris has
written about Japanese politics for publications including
the Financial Times, Wall Street Journal, and Foreign
Affairs and regularly provides on-air analysis for CNBC,
Bloomberg, and other networks. In 2006-2007, Harris
worked on the staff of Keiichiro Asao, at that time amember of the upper house of the Japanese Diet andshadow foreign minister for the Democratic Party of Japan,
for whom he conducted research on foreign policy andJapan’s relations with the United States. He earned an
MPhil in International Relations from the University ofCambridge and a bachelor’s degree in Politics and History
from Brandeis University. Harris has also conductedgraduate research at the Massachusetts Institute ofTechnology and, from 2011-2012, at the Institute forSocial Science at the University of Tokyo as a Fulbrightscholar.

Dr. Masahiro Kawai is Professor at the University ofTokyo’s Graduate School of Public Policy. He began his
professional career as a Research Fellow at the Brookings
Institution. He then served as an Associate Professor
in the Department of Political Economy of The Johns
Hopkins University, and as a Professor of Economics at
the Institute of Social Science of the University of Tokyo.
He also served as Chief Economist for the World Bank’s
East Asia and the Pacific Region, as Deputy Vice Ministerof Finance for International Affairs of Japan’s Ministryof Finance, and as President of the Policy ResearchInstitute of Japan’s Finance Ministry. Afterwards he
was Special Advisor to the Asian Development Bank
President in charge of regional economic cooperationand integration in 2005-2006, and Dean and CEO of the
Asian Development Bank Institute from 2007 to 2014.
Dr. Kawai assumed his current position in April 2014.
Dr. Kawai holds a BA in economics from the Universityof Tokyo and an MS in statistics and a PhD in economics
from Stanford University.
Yun Sun is a Senior Associate with the East Asia Programat the Henry L. Stimson Center and a Non-Resident
Fellow of the Brookings Institution. Her expertise is in
Chinese foreign policy, U.S.-China relations and China’s
relations with neighboring countries and authoritarianregimes. From 2011 to early 2014, she was a visiting
fellow at the Brookings Institution jointly appointed by
the Foreign Policy Program and the Global Development
Program where she focused on the Chinese national
security decision-making processes and China-Africa
relations. From 2008 to 2011, Yun was the China
Analyst for International Crisis Group based in Beijing,specializing on China’s foreign policy towards conflictcountries and the developing world. Prior to ICG,
she worked on U.S.- Asia relations in Washington
DC for five years. Yun earned her master’s degree ininternational policy and practice from George Washington
University, and an MA in Asia Pacific studies and a BA
in international relations from Foreign Affairs College inBeijing.
Asian Infrastructure Investment Bank: China as Responsible Stakeholder? 53

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